Need money quickly and easily? At first glance, the pay-day loan may seem like a solution, but it can quickly become a trap.
To get a loan in a bank, you need a good record and a lot of patience. In addition, bank credits are often medium-long term. But everyone does not need that. What about people who need only a small amount of money to pay a bill before the arrival of their salary?
The pay-day loan, what is it?
Pay-day loans, literally in French, are loans of a new format: short, simple and fast … but also very expensive.
Still little known in France, they are booming in Britain and the United States. They consist of borrowing (very) small amounts of money over very short periods. The repayment is done once at a specified date at the time of the loan application and the cash is in your account in not less than 5 minutes. From then on, it becomes easy to succumb to a desire in a store even if one does not have the money on the account!
Where is the trap ?
The interest rates charged can reach more than 500% on an annual basis! For example, on the LendUp.com site, to borrow $ 150 over 14 days, it will cost you $ 170, or $ 20 of interest. It may not seem like much, but reduced to the year, the interest rate is 355%! On Good Finance, the UK market leader, the interest is even $ 27 + $ 5 transmission costs (almost 600% year-round) for the same loan.
Everything is further complicated if the borrower fails to repay his loan in time: interest and late fees are multiplied so that we quickly reach astronomical amounts.
Good Finance, leader in this market, is growing rapidly (+ 67% between 2011 and 2012). It has granted 4 million loans for a total of 1.2 billion pounds in 2012. But is this really good news?
The target population for this type of loans are low-income people with cash flow problems. Applying high interest rates is the door open to the risks of over-indebtedness, especially as once a first loan contracted, sites seek to “retain you”.
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So a tip: better know before entering a payday loan how we will do to pay it back.
Last resort solution for many, these loans for the day are time bombs: surfing the wave of credit to vulnerable populations, these sites are full pockets and risk fueling the credit bubble of tomorrow.