When unrealistic expectations and desperation drive a consumer to take out a cash advance, they may be turning to the same source to pay off their loan instead of using it as a temporary way to make ends meet. Reports by The Pew Charitable Trusts non-profit organization are looking to understand the effects, often devastating, that the payday loan industry can have on American consumers.
The average cash advance loan is around $375 and has approximately $55 in fees attached. Although individual states are in charge of regulating interest rates and fees for lenders, consumers pay proportionality larger amounts for borrowing on small-dollar loans, in comparison to longer term personal loans through a bank or credit union.
The average cash advance loan is around $375 and has approximately $55 in fees attached. Although individual states are in charge of regulating interest rates and fees for lenders, consumers pay proportionality larger amounts for borrowing on small-dollar loans, in comparison to longer term personal loans through a bank or credit union.
Short-term lending is great for situations where a person needs cash in a hurry, doesn't have an upstanding credit score, or won't qualify with a traditional lending institution. The problem, though, is found in the ease of obtaining these types of loans. Pew found that 58% of borrower's are already having a hard time meeting their monthly financial obligations and are turning to cash advance loans to deal with persistent cash shortfalls, temporary cash emergencies or unexpected costs.
While these short-term loans are expected to be paid back with the borrower's next paycheck, it is being found that the average length of time it takes most people to pay off their cash advance or payday loan is about five months. This is causing a great deal of frustration and dismay for consumers turning to this type of lending.
Ironically, many borrower's turn to the very options they could have used when needing a cash advance, to repay their payday lender. Instead of seeking out financial help from family members, friends, pawning or selling personal possessions, or taking out another type of loan, they find themselves relying on a fast cash advance. When they end up unable to repay their loan, they then go to the aforementioned options for help.
Pew found that one-in-six borrowers have used their tax return to elminate cash advance debt. Although some consumers stated that they feel taken advantage of by this type of lending, a majority said small-dollar loans provide financial relief.
The study done by Pew reported that their are six primary reasons consumers take out these types of loans:
1) Desperation: One-third of borrower's said they have found themselves in such a desperate situation financially that they would borrow on any terms.
2) Reliance: Borrower's expect and rely on cash advance lenders for accurate information.
3) Perception: Cash advance and payday loans are not perceived by borrowers to be ongoing debt.
4) Temptation: For many, these loans are just too easy to get making it the best option in many cases.
5) Focusing on Fees: Often times, borrowers focus only on repaying loan fees instead of considering how repaying the loan itself will affect their budget.
6) Trust: Many borrower's feel bank payday loans are more regulated, and as a result safer, than other payday loans. The concept is still the same, though.
Regardless of where, when and from whom a person borrows, there will always be a price to pay. Cash advance loans provide a short-term option for those who are able to repay with their next paycheck. This doesn't always mean borrowing this way is the best option.
