Financial distress and bad credit are the prerequisite negative conditions that push people towards payday loans. For many Americans who can barely make ends meet and do not qualify for bank loans, this is perceived as the only solution for a quick boost in cash until the next paycheck or benefit pay.
Half Truths and Myths
The booming success of some instant cash loans shops is based on the promises they make, while failing to disclose the exact extent of fees, charges and interest rates they apply. At the same time, just like in many other instances where information is scarce, some myths appeared and took hold as factual truths.
People who apply for this type of loans are not just in dire need of cash, but are not fully informed of the rules and penalties associated to this loan either. They also base their decision on the myths running around by word of mouth or even in print on various websites.
Recently, even figures of authority, such as a professor from Indiana Wesleyan University, stood up to defend payday loans against criticism, but only added authority to some of the myths circulating around.
Exposing the Myths
Before more of these myths regarding no credit check loans take hold, it is time to deconstruct them and explain what the actual truth is. The most common misconceptions about short-term loans are as follows:
- The interest on the loans is a fixed, affordable amount
The interest on a short-term loan is calculated per dollar per week of lending. It is not really affordable for people who urgently need $100 to pay back $115 – $125. The same amount of money taken off a credit card would incur an interest of only a few dollars – and this is the hypothetical case of expensive credit cards.
In reality, short term cash loans carry huge interest rates calculated as annual percentage rate (APR), in the range of 400-500%, compared to 30-40% charged on credit cards. Moreover, just one day of delay in repaying the loan plus interest carries hefty penalties.
- These loans are taken only for rare emergency situations
In theory, people apply to this type of lending facility in rare situations when they need cash for emergencies – such as hospital fees. They repay the loan and go on with their lives, unaffected about this financial decision over the months.
In reality, once they take on a loan of this kind, borrowers enter a long cycle of repeated loans. They are left financially depleted after they repay the first loan and need another one to make ends meet, or they find themselves unable to repay the whole amount they owe, so they borrow money again just to repay the first loans. Quick loans have long, overshadowing effects on low earners’ finances, as shown by statistical evidence.
A study conducted by Pew Charitable Trusts showed that:
- 69% of the borrowers use the money for recurring expenses, such as rent, utilities and food;
- Only 16% of the clients of payday loans needed the money for emergency situations;
- Once a person takes on such a loan, the cycle of borrowing and repaying extends to over 200 days of the year.3. This is the only hope for some people to get a loanIt is true that they may not qualify for long-term loans in amount of thousands of dollars. However, banks have adapted the way they are doing business and allow short-term loans for small amounts (usually under $1,000) with lower guarantees and no credit check. Credit unions are also willing to offer cash before the paycheck day under affordable repayment conditions.
- With the dispelling of these myths, more and more people should become aware of the risks and avoid getting trapped into repeated payday loans with huge interest rates.
- The strongest argument in debates brought in favor of payday loans is that people with bad credit cannot borrow money in any other way. This is a half-truth, and, because it leaves out a critical part of the information, it is damaging to people in need of a cash boost.
- Numbers do not lie. Borrowers do not take these loans on rare occasions, and they rarely repay them and move on with their lives. Instead, they remain trapped in a system that feeds on itself, creating more debt with each loan taken to pay for the previous one.