Try to imagine a mechanism that
doesn't look at a consumer's credit history, gender, sex, religion, or income,
awards them with money whenever they ask, and potentially serves as an
individual's only means of acquiring emergency money. This non-discriminatory
monetary mechanism comes with a catch though: it has an exorbitantly high
interest rate and is built in such a way that some say they inherently trap
their users in a never-ending downward spiral of financial hardship and debt.
No, this isn't a hypothetical concept brought about for a philosophy class's
ethics discussion. What we're talking about is a payday loan.
The Anatomy of a Payday Loan
Payday loans are a type of financing
that requires no more than a post-dated check in return for cold, hard cash.
They're the preferred method of acquiring cash advances on one's paycheck,
particularly for those with bad credit ratings or no credit scores at all,
since collateral and history are foreign and useless concepts to payday
lenders.
But the equal and opposite reaction
to such light lending standards comes in the form of high-often called
excessive-fees and very short terms. Most of these loans are granted at a rate
of roughly a dollar a day and are expected to be paid off within a two-week
time period. When such a fee is stretched out and measured by the same standard
as other types of loans, the results are astounding.
Annual percentage rate (APR) is the
Rosetta Stone of the lending world, and grants consumers a quick look at how
much a particular loan costs when compared to other offers. The APR tells
consumers how much a loan's interest would cost if the loan were held for one
full year. Home loans, for instance, often come with an APR of below 10
percent. Auto loans can usually be found with APRs of between 5 and 12 percent.
Payday loans, however, carry a 390 percent APR-and that's on the low-end of the
scale. Some of these quick cash advance loans have been reported to breach
1,000 percent.
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