Payday loans are a type of loan that has become notorious for its predatory nature. These loans are typically offered with high fees and short repayment terms, making them difficult for borrowers to pay back on time. In some cases, the interest rates associated with payday loans can be as high as 300%, which is why sixteen states have banned them altogether. Even in states where payday loans are legal, they are subject to federal laws that protect borrowers from unfair, abusive, or illegal tactics.
When it comes to payday loans, lenders often do not take into account a borrower's credit score or other risk factors such as loan-to-value (LTV) ratios, subordinated liens, and debt-to-income ratios (DTI). This means that African-Americans and Latinos are more likely to receive subprime loans at higher costs. Furthermore, some lenders may waive credit checks before offering a loan, which can make it difficult for borrowers to assess their ability to repay the loan. Allen King*, a graduate student in the Triangle area of North Carolina, found himself in a difficult situation when he had accumulated four payday loans and was unable to repay them due to the lack of installment plans offered by lenders.
He worked down the street from the payday store and called to see what he needed to get a loan. During this time, he juggled ten payday lenders, spending his lunch hour moving from one lender to the next scrambling through the various loans. It is important for borrowers to be aware of the risks associated with payday loans and other forms of predatory lending. Borrowers should always consider other options such as personal loans, credit card balance transfers, and HELOCs before taking out a payday loan. Additionally, they should be aware of their rights under federal laws such as TILA which requires lenders to disclose the cost of loans including financial charges and APR.