Do You Believe Any of These Four Payday Loan Myths?
Payday loans have earned a somewhat negative reputation but you shouldn’t believe all the bad publicity surrounding them. Lenders using unfair lending practices have led to some common misconceptions. However, the purpose behind the design of the payday loan is to help borrowers with small loans other lenders typically do not provide.
Individuals who believe the myths against same-day payday loans don’t understand that they are just small, short-term loans that are a suitable option in cases where unexpected expenses occur.
There is nothing wrong with taking out these loans as long as individuals are responsible, educated about them and can handle them. The following myths confuse the facts and prevent some individuals from benefiting from payday loans.
Myth #1 : Payday Loan Interest Rates are Always Very High
Payday loans have earned a negative reputation for high-interest rates. However, the interest rates borrowers pay on a payday loan will depend on various factors, including credit. An individual with good credit is more likely to get a reasonable interest rate. When looking at lenders, it is obvious that some offer much better interest rates than others.
All lenders are required to disclose their fees in terms of the annual percentage rate (APR). In other words, this is the interest charged over the course of a year. Same-day payday loans are short-term loans and are not designed to continue over a year.
For example, if you borrow £400 for four months at a monthly repayment of £149.37, your total repayment is £597.48 at a fixed interest rate p.a. of 255.5%. This represents an APR of 939.5%.
An APR may sound like a very large number but it is important to keep in mind what APR means and how this applies to a payday loan. Measuring payday loan interest rates with APRs is much like measuring car rental rates or hotel room rates by the year instead of by the day.
Myth #2: Payday Loans have Hidden Fees
The U.K. payday loans industry is well regulated. It is not only untrue that payday loans have hidden fees but it is also illegal. Lenders have to disclose all their terms and conditions upfront. Loan agreements contain clear disclosures regarding any fees that apply to a loan.
It is up to borrowers to read the terms and make sure they understand them before signing. If they don’t do so, they could be in for a surprise. Surveys reveal that most borrowers say they do understand the fees associated with their loans, including what they have to pay if they don’t repay a loan in time. They are fully aware that they may have to pay additional fees if they default on their loans.
Myth #3: Payday Lenders use Aggressive Collection Tactics
FCA authorized, reputable payday lenders may market aggressively but they will not resort to aggressive collection tactics. They have to use fair and lawful means to collect payments past due. They communicate respectfully with borrowers who are unable to make payments on time.
For borrowers in such a situation, they are prepared to discuss date extensions. Those who feel they have been coerced can always file a formal complaint with the Better Business Bureau.
Myth #4: Payday Loans Trap People in a “Cycle of Debt”
There is a common myth that individuals get tricked into taking out payday loans and get trapped in a vicious cycle of debt because they are never able to pay them back. However, reputable lenders will verify a consumer’s ability to repay a loan before approving an application.
Borrowers will typically pay back their short-term loans on time, usually on their next payday. They only pay interest for the actual duration of the loan if they repay it before the due date. Lenders usually have many ways to help borrowers pay off short-term loans successfully.
Payday loans are good short term loans provided that borrowers repay the loan off in time. Lenders receive only a little interest if borrowers pay back on time or in advance. However, just as with other kinds of short term loans, these loans can become expensive when borrowers miss a payment or default.
An Additional Myth: Payday Loans are for Poor, Uneducated People with Bad Credit
Predatory lenders may unfairly target a certain demographic or certain vulnerable people. However, reputable lenders do not do so and the individuals who benefit most from payday loans are middle-class individuals with full-time jobs. They use payday loans to deal with unexpected expenses and emergencies. All that taking out such a loan means is that they did not have access to cash immediately when dealing with an unexpected expense.
Lenders usually require proof of income, an active bank account and a permanent address before granting a payday loan. Financial information must meet requirements and a repayment plan ensures borrowers have the opportunity to replay the amount in full plus interest.
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