Payday Loans: A Closer Look

payday loan debtCash advances, also known as payday loans, are dangerous business. These loans are given to people who are in need of money quickly but can’t get it from other credit lenders due to a low credit score. Payday loans are almost always approved no matter what the situation, but there’s a very serious catch — the enormously high interest rates.

Interest rates for payday loans can be anywhere from 200 percent to 1,000 percent repayment, so why would anyone take out such a life-ruining loan? Unfortunately, the need for quick money often trumps the longterm consequences. It’s a story that’s been told time and time again, and it’s only recently that the government has attempted to step in to help put a stop to it.

The Risks Of Payday Loans 

A Kansas City, Missouri, man learned the hard way just how dangerous payday loans can be when he got hit with $50,000 in interest on a $2,500 loan.

Elliott Clark said he felt the money was needed and he had no other option given the fact that his wife was unable to work due to an injury and his job as a security guard wasn’t paying the bills. Clark took out five short term loans of $500, which ultimately racked up a combined $50,000 in interest.

“I had nowhere else to go,” he told the Kansas City Star. “I had a family, a daughter in college, bills to pay. … I’m an honest man.” Clark condemned the actions of payday loan businesses that do to countless people what they did to him.

“Those places shouldn’t be allowed to do that. It’s just glorified loansharking,” he said.

Banking On Failing 

Payday loan businesses, believe it or not, rely on a person’s inability to repay their loans. Richard Cordray, the director of the Consumer Financial Protection Bureau, explained how it works in an interview with the New York Times.

“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” Cordray said. “It is much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”

What’s Being Done 

In a country where 47 percent of citizens don’t have enough money to cover small, unforeseen emergencies like medical bills and car repairs, payday loans take advantage of that fact and completely paralyze those who need quick money with insanely high interest rates that are almost impossible to pay back without finding yourself in a vicious cycle. There are, however, things being done to prevent such reprehensible practices from continuing.

New guidelines set by the Consumer Financial Protection Bureau payday lenders will be required to verify a person’s income before approving a loan — ensuring that they can afford to repay the money that they borrow, and therefore curtailing the problem of people rolling into additional loans just to make the other ones work and building an enormous about of debt from interest.

Payday lenders say that the proposed guidelines, which do not need Congressional approval to take effect, would completely devastate the industry.

“Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services,”  Dennis Shaul, chief executive of the Community Financial Services Association of America — a payday lender trade group — told the New York Times.

The guidelines for payday lenders could potentially take effect in 2017.

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