As we fast approach the 2014 new year, we will face another holiday season which can be extremely stressful and financially challenging for millions of consumers. Borrowers should really think twice before getting a quick holiday loan, or a quick cash loan from one of the storefront lenders. There are two dangers for the consumer in these loans.
The first is the exorbitant interest rate charged, and the finance charges. For example, the Federal Trade Commission states in a consumer advisory that the finance charges to borrow $100 can range up to $30 for two week loans. These finance charges are sometimes accompanied by extremely high interest rates that run up to 750% APR. If the $100 loan is renewed twice, the interest would be a minimum of $45 up to $90, according to the FTC.
The second danger is that 90 percent of the short term loan borrowers are not in any better position to pay off the loan than they were when they accepted the loan. The loan company will gladly roll the loan over and add more interest fees. Some states will only allow a short term loan form a quick loan company to be renewed only once. This means that the entire loan amount plus interest and fees must be paid, or the total amount due will be deducted from the borrower’s checking account electronically.
The other practice is the borrower has to have a checking account and they must write a check for the total amount due when they take out the loan. If the loan is renewed, then another check is written to cover the higher amount. The check will be cashed at the borrower’s bank if the loan is not paid when due. If the check bounces, the lender now has an NSF check which they can turn over to the local prosecutor who will arrest the borrower for writing a bad check.
If the money is not available to the household, then the possibility that the money will not be available in two weeks is high. The borrower needs to realistically assess the possibility of having funds to pay off the loan.
These lending sources have studied borrowing patterns and they know that the vast majority of borrowers cannot pay the loan back in two weeks. So, it is important to for the borrower to recognize that the odds are against them despite their good intentions.
By borrowing from these lenders, the public is reinforcing their position in the community and making these lenders stronger and more profitable.Often, the borrower goes to another quick loan company to get the money to pay off the first loan. Thus, the terrible cycle of indebtedness grows.
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