Bad credit has a lot of consequences and the inability to get loans when unexpected expenses arise is one of these consequences. There are, however, many companies that prey on those desperate for cash, in the form of high interest and high fee loans with very unfavorable terms. These loans are rarely beneficial because you end up in worse financial shape than when you started.
What Are Payday Loans
Payday loans are short term loans for amounts generally under $1,000 dollars. They are typically due the next payday, which makes them 7 to 14 day loans. Most of these loans come with fees so it may be hard for the average person to calculate the effective annual interest rate, which averages 400%. Typically no credit check is made and the only requirements are a pay stub, a driver’s license and a bank account. They are easy to obtain and you can often get money in 24 hours.
What Are Title Loans
Title loans have similar interest rates to payday loans but require a titled asset to secure the loan. Typically secured loans have lower rates, but for title loans that is not the case. If you own a car, truck or boat without a lien you can get a title loan. The loans are easily approved and you can be approved for amounts ranging from a few hundred dollars to around $5,000, depending on the value of the asset. Generally title loan companies offer 25% to 50% of the value of the vehicle and then charge triple digit interest making it very difficult to pay off the loan. Common interest might be listed as 25% per month, which translates to 300% annual interest rate plus fees. You are able to keep the vehicle while the loan is outstanding, but if you miss a payment you risk having your vehicle repossessed.
What Are Pawn Shop Loans
Pawn loans are similar to title loans in the sense that you must have collateral to get the loan. The advantage of a pawn shop loan is that this can be most anything of value. Electronics and jewelry are popular options. Collateral could also be music equipment, tools or collectables. They charge similar rates to title loans and are usually in the 300% to 400% interest rate range, making them very expensive short term loan options. In addition to high interest rates, you might be charged storage fees or other fees for the loan. With a pawn shop loan they keep the collateral until the loan is paid in full. Late payments may result in losing the items you pawned.
There are laws called “usury laws” that regulate each of these industries on both the federal and state levels. Most protections include interest rate caps in an effort to protect consumers. The challenge with interest rate caps is that companies get around it by charging fees instead of interest to maximize profits. Because they are short term loans, and they lend to high risk clients, they get away with terrible terms and high interest rates and fees.
On the surface the loans may not look too bad. You get $300 and pay a $40 fee that will be paid back in a week. You can live with that. However, when you can’t pay the loan back on time, more fees accrue. On payday loans the average borrower takes 5 months to pay back the loan and will pay $800 dollars for a $300 loan. It’s easy to see these loans are not doing you any favors and should be avoided.
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