Payday Loans – Legal Risks Associated With Payday Lending

Payday lenders typically charge borrowers a higher interest rate than other lending institutions

Payday loans are small short term cash loans usually based on an individual’s post-dated check held for later deposit into a bank account or on instant electronic access to the individual’s account. Borrowers write out a personal check for the exact amount borrowed plus finance charges and receive money directly from their lender. In some instances, borrowers agree to sign over electronic access to their checking account to receive and pay back payday loans. The amount of the loan is for often depends on the individual situation.

This is due to the nature of the loan as well as the risks involved with the lending process. Payday lending companies are very high-risk because they do not have any collateral to secure the loans themselves in the case the borrower does not repay. Because of these risks, payday loans carry a higher interest rate and, therefore, a higher interest rate payment for the lender. The interest rate is charged for a reason – to ensure that the lender is not losing any potential profits on the arrangement.

many lenders try to provide competitive deals to attract borrowers

There are a few tricks that payday lenders use to reduce their payday loan interest rates. One way is to offer special deals such as no faxing or NO credit check loans. Another way to get a lower interest rate is to take out a high risk loan with higher interest rates. Payday lenders often charge extra money for the additional risk, however, in the long run the extra interest will be worth it.

When a payday lending company offers a no faxing or no credit check loan, there are some things that the lender can ask to authenticate the identity of the person requesting the payday loan. Often times, the payday lenders would require a social security number. Sometimes, they would also ask for proof that the borrower has an income. Other times, they would ask for documentation of past debts that the applicant owes. In order to reduce these risks to the payday lending company, many payday lenders would create a borrower profile for their customers. Each borrower would have his or her own risk profile, and the payday loan lender would create a specific loan for that borrower.

Another way that payday lenders can reduce their interest rates

Some lenders do this by capping the amount of interest that can be charged on a given loan. Others would tie up the principal in a bank account until the amount owed on the payday loan is paid off completely. If a customer cannot pay off the entire loan on one payment date, then the interest rate that would be applied to that loan amount is increased. Payday lending companies are required by law to inform their customers of these fees.

The legal risks of these payday loans also apply to service members. Many of these lenders require their members to fax copies of their identification to them. In many cases, these lenders also require members to provide copies of their checking or savings accounts. These lenders use the information contained in these accounts to protect themselves from possible consumer fraud. Therefore, service members should always be suspicious of any requests for personal financial information, whether they come from a payday lending service member or from a third party.

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