| Unsecured Loans Making Bad Worse |
| By Credit Federal |
Published
03/23/2008
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Payday Loan
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Easy approval unsecured loans come at a cost
It's true. Even if you have bad credit you can still get an easy approval, high risk unsecured loan with no cosigner, no collateral, and you can get the money as fast as one day. Certainly these payday advances offer a valuable service to cash strapped consumers, but can become a debt trap if repayment is extended (rolled over) or the borrower simply cannot repay in time.
The latest impact: Homeowners who are behind on mortgage payments. The attraction of short term unsecured loans is hard to resist, and since this type of loan has no interest rate since it is fee based, it's easy to forget the long term cost.
Generally a payday loan is for up to a little over $1000 dollars with a term of two weeks and a fee that is equivalent to an interest rate of up to 800%. You would think that such a high interest would deter borrowers, yet payday lenders have loaned out in the billions of dollars, often just at several hundred dollars at a time.
Estimates from nonprofit credit and mortgage counselors suggests the use of payday unsecured loans is growing as the U.S. housing crisis deepens.
Payday loans have grown so popular, in the Union Miles district of Cleveland where the mortgage crisis has a huge impact, all the conventional banks have been replaced by payday lenders with brightly painted signs offering instant cash for a week or two to bad credit people.
How can payday loans satisfy bad credit borrower demand, while keeping interest related fees low and also minimizing lender risk? That's a question these unsecured loan companies must answer, and answer quickly if they desire to stay in business and without government intervention. If they cannot, it's likely the government will step-in. Lenders would then face a reduced profit margin, which could ultimately terminate these easy approval cash loans altogether.
But is the problem really with the payday lenders, with the borrowers, or maybe the problem rests on both? Or could the blame be shared amongst many?
Consider this scenario: A young single mother runs out of a special formula for her baby. It's three days until payday. She goes to a store and purchases the formula on a credit card charging 23% interest. Three days later she gets her paycheck, but then has car troubles and spends the money she would have used to payoff the credit card charge in order to repair her car. Her credit card bill comes due, yet once again she's strapped for cash before payday arrives. If she fails to send her credit card payment in on time, she faces a $30 late fee. On top of that, her credit rating will be lowered and she'll suffer higher interest rates for future credit and; perhaps, on her existing card as well. So she gets a payday loan to pay her credit card bill. The $60 fee is offset by the $30 late fee her credit card issuer would have charged, as well as by protecting her credit rating from being damaged and the subsequent threat of increased interest. So who's to blame at this juncture? Is the payday lender guilty of charging too high a loan fee, or maybe it's the credit card company charging too high of a late fee and threatening to impact her credit score and raise her interest charge? Perhaps in a situation like this, the payday lender came to a consumer's rescue? But what if our young lady didn't repay the payday loan when it was due? Now is the lender the bad guy, or is the borrower to be held responsible for not repaying timely?
Yes, payday loans charge a fee that is comparitively higher than a credit card or a personal loan interest rate, but often payday loan lenders extend their services to very high risk people. People who are often rejected for a standard line of credit; such as a personal loan, from even their very own bank where they've done business for generations. High risks require high payoffs.
Summary: For credit to continue, thrive and expand services, every person; whether lender or borrower, must accept equal responsibility in all transactions and enter into agreements with full disclosure and understanding.
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