Payday loans offer customers the opportunity to access cash quickly without being subjected to detailed credit checks; however they are charged very high interest rates. While many borrowers believe they can pay off the loans quickly, the Better Business Bureau (BBB) warns that payday loans may have long-lasting and devastating effects. The BBB has seen a 91% rise in inquiries for payday loans in the past twelve months, which shows that consumers seem to be taking more caution before signing onto a loan.
"It is extremely important to understand the terms of the payday loan and make sure it is plausible to pay back," said Steve J. Bernas, president & CEO of the Better Business Bureau serving Chicago and Northern Illinois. "Many times the interest rates are so high that customers fall into a cycle of debt.
"The 91% increase of inquiries shows that consumers are using the BBB's free services to research companies before doing business with them," Bernas added. "This is exactly what we want consumers to do, and then make informed decisions."
A typical payday loan follows this type of pattern: a customer agrees to a loan for a few hundred dollars to be paid off in a few weeks. Bank account information is supplied to the lender and the money is promptly deposited. The consumer's subsequent payments go toward paying off recurring finance charges and never toward the principal. As a result, the customer can pay two and three times the amount of the original loan and still has the same amount of principal to pay off. Many customers find themselves worse off after experiencing this pattern.
When looking for a payday loan online the BBB recommends the following:
Look for the red flags. Unscrupulous online lenders often wave the same red flags, including not being forthcoming about their location or contact information. Also, be cautious of any lender that doesn't ask you for any background information outside of your bank account number.
Research the lender with the BBB. Always check an online payday lender's Business Review before you hand over any bank account information. BBB Business Reviews are available for free online. They tell you how many complaints the BBB has received, how the company responded to complaints and the BBB's overall letter-grade rating.
Know regulations in Illinois. Payday loans can be extremely expensive if you are unable to pay the loan off quickly, and in some states payday loans are unregulated. Under a law passed in March 21, 2011 there are more strict laws regulating payday loans in Illinois . Even with the new regulations, these are still high risk loans and it is important to look at all different options before investing.
Look thoroughly at the contract before signing. As with any business transaction, be sure to read all agreements, guarantees, and instructions before signing. Do not be pressured into signing an agreement before you are ready and you understand all terms and conditions. Make sure all oral promises are put in writing. Be wary of vaguely worded provisions, exclusions or limitations which could pose a problem later. Never sign a contract with sections left blank.
For more consumer tips, visit www.bbb.org