A loan is a financial obligation to the lender by the borrower. Actually, it is an asset to the lender – and just like any other asset (e.g. a car, house, etc.) it should render a service or an income. The interest that the borrower pays on their loan to the lender is the kind of income banks and other financial institutions count on. But how can a lender be assured that the interest on a loan will be paid on time?
This is the big question that most lenders must answer before lending you money. When trying to answer this question in each individual case, the lender must rely on a number of well determined characteristics about the borrower. Is he or she employed? Are his or her spending patterns sustainable over time? Unlike mainstream banks and credit card companies that make their decisions based on one’s FICO score, bad credit lenders that cater to those customers with less than perfect credit scores, have to use other indicators of one’s creditworthiness. This, in a nutshell, is the reason why annual percentage rates (APRs) on such loans are very high.
It is not surprising that those of us who do not qualify for a major credit card or a low interest personal loan, find themselves astonished when they see a triple digit APR on their small short-term loan. Here is a few tips that will help anyone considering a payday or any other high interest loan product to avoid some common pitfalls.
First, make sure not to over-borrow. This one is actually easy to follow. Many U.S. states stepped up their efforts to put safeguard regulations in place that protect consumers from predatory lending practices. State regulators realize, however, that we all, now and then, fall short on bills and other expenses. So, they require small loan lenders to run affordability checks and limit fist-time loans just up to $500, in most cases. This also answers the question when it may be appropriate to take such a loan. Paying some urgent bills or other expenses is one good example. Notice that, in most cases, the math is not in favor of larger loan amounts. While a $500 loan may cost you about $100 in finance charges and fees, a $1,000 loan would require one to come up with over $200 in interest payments (based on a 14 days loan term).
Second, try to repay your loan early. The best way to save on the loan costs is to pay it back ASAP. Taking advantage of the early repayment clause would save dozens if not hundreds of dollars depending on the borrowed dollar amount. You can send a payment right from your account or, if this option is unavailable, contact your lender to ask about how you can repay your loan early. We encourage lenders in our network to follow the best practices and early repayment clause is one of them. So, do not hesitate to contact your lender or contact us directly and we will try to negotiate on your behalf.
Do not be late with payments or try to extend your loan. Well, it is true that under CFSA code of best practices, small loan lenders should provide an Extended Payment Plan (wherever allowed under state law) to their customers who are unable to repay a loan with accordance to the original due date. And if you ask about such a plan, you will most likely be offered one. One should be aware, though, that EPP does not automatically waive late payment fees and other penalties.
To recap, do not take out too much, try to repay early and avoid extending your loan at all costs.
Next: Loans piling up? Look into consolidation.
We will talk about some alternatives to mainstream payday loans in our next blog post. Stay tuned.