Payday loan is a professional industry but payday loan lenders who conduct their business legally and honorably suffer from bad reputation. At best, they are regarded dubiously. At worst, they are described as loan sharks disguised as lambs. This dreadful label was created due to several groups of unscrupulous people who pose as legitimate payday loan lenders. To distinguish predatory payday loans from reputable ones, here are six signs that you will look for.
First, the recommendation from CFSA is missing. CFSA or Community Financial Services Association of America is an organization of payday loan lenders who uphold exemplary ethics in the industry. Without a CFSA recommendation, the lender may be practicing less than sterling procedures. We suggest that you look for another payday loan lender.
Second, the interest rate is in triple digits. Compared to other types of loans, payday loans indeed have higher interest rates. When presented as annual rates, the numbers will reach three digits. But a payday loan should never reach 12 months. There are roll-over limits and after that, no more interest can be added.
Third, a predatory lender will structure the loan terms so that over a three-month period, the lender will pay the whole amount borrowed on the third month. This is called a single balloon payment. The amount is prohibitively high that the borrower will most probably not meet it. This becomes an advantage to the lender since they could again add interest to the borrowed amount. Ideally, the payment of the loan should be spread over the three months or six pay periods.
Fourth, the predatory lender conducts loan flipping. The lender actually encourages the borrower to extend or to roll over or to change the payday loan into another type of loan. What actually happens is that the lender is trying to pile as much interest as they can on the amount borrowed. Legitimate payday loan lenders are supposed to inform their borrowers that payday loans are short-term solutions and that there are credit counseling services for people with deeper financial problems.
Fifth, the predatory lender urges the borrower to get loans from several lenders. With so many due accounts, the borrower may become unable to meet all his financial obligations. As a result of default, the amount owed to the predatory lender increases.
And sixth, the predatory lender does not take into account the capacity of the borrower to pay. Reputable lenders have set a minimum salary requirement and a maximum amount that may be borrowed by a lender. Predatory lenders, on the other hand, will sound solicitous by advertising that they will approve whatever amount you wanted to loan even if you have a very small salary. This is, of course, too good to be true.