I still remember the first bad financial decision I ever made. My seven-year-old buddy told me that if I lent him a few dollars, he would pay me back ten a few weeks later. Unfortunately, he forgot all about his debt, and I was left without my allowance. Although it might seem like a silly example, bad financial decisions like that one plague adults everyday. I have had my fair share, and so I decided to create a blog dedicated to helping you to invest your money properly. Before you take your hard-earned money and throw it at a cause, think about the advice on my website to make a great decision.
Payday loans are short term cash loans. Primarily used for emergencies but available for a range of purposes, these loans are typically funded on the day or the day after you apply, but they must be paid back on your next payday. In exchange for these convenience loans, borrowers have to pay fees, but luckily, there are a number of ways that payday lenders work to keep fees low.
Here is a look at the top five:
1. Data-Sifting Algorithms
To understand how payday lenders work to keep their fees low, you have to understand the basics of lending. Whether you are getting a mortgage, a credit card or a payday loan, the lender will typically base the interest rate (or fees) on your perceived ability to repay the loan.
Basically, if you have a great credit history and a secure income, you are likely to repay loans, and as a result, lenders will treat you to lower interest rates. Payday lenders, in contrast, do not check credit reports, and thus, they need other ways to assess a borrower's ability to repay.
One option is to use a data-sifting algorithm. Using software that crunches all kinds of details from multiple online sources, these companies are able to identify competent borrowers and offer them lower fees. However, not every payday lender has warmed up to this screening method. Others use tried-and-tested methods such as post-dated checks to reduce risk of default and keep payday fees low.
2. Post-Dated Checks
Abbreviated as pdc's, post-dated checks were once commonly used to secure payday loans. Borrowers received their cash in person, and they signed a check to repay the loan and its fees, dated on their next payday. With this check in hand, borrowers are relatively assured that they will be paid back on the due date.
As swathes of the payday lending industry have moved online, many lenders have moved away from pdcs. Instead, they accept their electronic version.
In this case, borrowers simply sign something saying that they allow the payday lender to take a payment for the loan and its fees on their next pay date. Fortunately, if a borrower does not have a checking account, they can work with a lender who uses other strategies to reduce fees.
3. Markers of Stability
In the absence of a checking account, payday lenders have to look at other clues to indicate financial stability. Payday lenders will not usually pull your credit report, but they may want to see how long you have had your phone. Alternatively, they may want to verify how long you have been employed.
4. References and Utilities
In addition to looking at financial markers of stability such as jobs and phones, lenders also look at borrowers' personal markers of stability. To assess that, borrowers may ask to see copies of utility bills – those bills show that you are permanently (or at least semi-permanently) at your address.
They also ask for names and numbers of personal references. Legally, these people can never be called about your loan, but if you are willing to provide the lender with the name of friend or relative, it makes you look more stable and like less of a flight risk. The more stable a lender's client base is, the lower the lender's overall fees can be.
5. Collateral
If a lender cannot establish stability using one, or a combination, of the methods described above, the lender may ask for collateral instead. In most cases, payday lenders do not ask for collateral, but other short term lenders such as title loan lenders accept car titles in exchange for granting loans. Similarly, pawn shops may also grant loans in exchange for collateral. In some cases, payday lenders are associated with these types of lenders so that you can apply for multiple funding sources in the same building.
The next time you get a payday loan, pay attention to the ideas above. If you get tired of jumping through hoops to get the loan, just remember that those safeguards are in place to keep payday loan fees low. Visit http://www.1stchoicemoney.com to learn more.
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