Payday loans are generally associated with unscrupulous lenders who carry out their business without any regulation or consideration for borrowers. This is, however, a myth as in the current era, the reality is starkly different.
The payday loans sector is comprehensively regulated with varied state and federal laws governing it. It is legally binding on all payday loan lenders to strictly follow all rules, maintain transparency, treat customers fairly, and offer all details to prospective borrowers before disbursing the loan.
Listed below are a few myths about payday loans that can help dispel the misconceptions held about it.
• There are hidden charges and fees in payday loans: People incorrectly think that payday loans have hidden charges and fees because most of them do not read the terms and conditions of the loan. It is important to remember that the payday loan industry is stringently regulated. All payday loan lenders have to inform customers of all fees, late payment charges, application fees, and other applicable additional charges before a borrower takes out the loan. All fees are charges have to be clearly mentioned in the loan contract.
o The interest rate of payday loans is higher as compared to traditional loans because of the fact that payday loans are unsecured loans without any collateral. That is the only difference between the workings of traditional loans and payday loans.
• Payday loan lenders want to profit by entrapping borrowers into a debt trap/cycle of debt: A debt trap refers to constant borrowing to repay old loans, which increases interest, fees, penalties, and overall debt, which becomes unaffordable and eventually results in default.
o Payday loans are not associated with a cycle of debt, as the main cause of debt traps is irresponsible borrowing. People who borrow beyond their means, in access to their income and financial status, are mostly like to become trapped in a cycle of debt. Payday loans are just a readily available and affordable source of short-term funds for emergencies like car repair, medical bills paid, etc. The lenders of payday loans are not in the business of exploiting borrowers. They only offer the service of providing short-term financial assistance. It is important for individuals to borrow responsibly, in tune with their financial capacity to repay the loans, so as to avoid falling into a debt trap.
• Payday loans can have a negative effect on the credit score: Payday loans work just like any other kind of loan or credit. If the loan is repaid on time, along with the interest and other charges, then it may have a positive effect on the credit score. If the loan is not repaid on time if there are late payment charges, or in case of a default, the credit score will be negatively affected after the lender reports the default to the credit bureaus. Hence, as is the case with traditional loans, borrowers need to repay the short-term payday loans on time to prevent any negative impact on their credit rating.