A payday loan is a type of short term borrowing where a borrower’s income and credit profile will make lenders increase high-interest rates. A payday loan in simple terms is the portion of the borrower’s upcoming paycheck. These type of loans always charges higher interest rates for a short time and the immediate credits. Payday loans can also be best described as advance loans or check advance loans. However, due to their high-interest rates, several laws over the years have been put forward to govern them.
How payday works
They are described as a type of unsecured personal loan this is because they do not need any collateral to give you credit. These types of loans always tend to charge high-interest rates they are therefore considered to be predatory loan due to this reputation. They, at times have hidden provisions that end up costing extra fees. If you want to take a payday loan, you should be careful when choosing for your safety.
How to obtain a payday loan
Payday providers are only small merchants that offer credits. Most of them have physical locations and allows borrowers to apply and get pay day loans onsite. Others offer their services online where borrowers can submit their applications and attach employer’s pays tubs showing the current level of income. The loan principal offered by payday lenders is always based on the percentage of the borrowers’ level of short term income. Most of them use the borrowers’ income as collateral. Another factor that will determine if you will get a loan is your credit history. This data is obtained from the hard credit pull site.
About the payday interest rates
The payday interest rate charged to the borrowers are incredibly high that can range up to 500% annually. Most states have set their law to regulate the interest rates to approximately 35%. However, most payday lenders fall under the exemption that allows them to continue charging them high rates. Borrowers should be aware of these payday lenders as some qualify through the lending loopholes. The individual state usually governs the rules and regulations of these loans with some states outlawing any kind of payday loans. Even with the federal truth in lending act requirements for any payday to disclose their charges, some borrowers still ignore the costs. Some borrowers have filed cases against these lenders since the enactment in 2008 after a financial crisis that required lenders to be more transparent to the consumers.
Measures to regulate payday loans
Under the Obama administration efforts to regulate the payday lenders began in 2016 where rules were passed to protect consumers from “debt traps”. These mandatory rules include:
• The lenders should undergo a necessary underwriting to make sure the borrower can pay the loan and still meet his day to day needs before a credit is issued.
• It also requires the lender to first write a note to the borrower before attempting to debit the client’s bank account.