DEBT CONSOLIDATION: IS IT GOOD FOR YOU?

Having debts can be very stressful. It is more stressful if you have difficulty paying up. This calls for solutions. Debt consolidation is a solution on the list. Considered it a life saver, it’ll be useful for you if you understand what it involves.

Debt consolidation is getting a loan to be able to pay up and clear the other debts you may have, then pay off the debt. It involves approaching a new lender and getting new terms that involve a different interest rate. Debt consolidation, in turn, allows you to get money from one source (lender) to settle all different debts and credits that you may have.

Common major problems solved by taking up debt consolidation

Debt consolidation literally may help you in getting out of debt. The following are things to avoid:

  1. High-interest rates

Debt consolidation helps in getting out of debt

Debt consolidation helps in getting out of debt

Chances are that the actual debts you have command high-interest rates. This translates into a large amount of money ending up into your creditor’s pockets at the end of the day. You may even discover that your debt is growing as you continue repaying. A debt consolidation becomes the perfect way out. Debt consolidation gives you the ability to get out of the debt problem so that you not only settle your debt, but also get a new consolidation loan with a lower interest rate.

  1. Higher monthly payments

When you have many different debts, debt consolidation becomes a lifeline. With the use of a debt consolidation plan, you get the chance to combine different debts into one consolidated debt. This means there’s just one debt and one repayment amount to manage. The consolidation plan with a lower interest rate leaves you with less to pay, thus your monthly repayment amount is reduced.

  1. Bill confusion

Debt consolidation gives you the chance to be focused on only one debt repayment. For example, if you have so many debts and different repayment plans to service each month, should you forget to pay up or pay late, you will have to pay a lot more in the end. With debt consolidation, you just need to think of how to pay that one repayment amount by the end of the month and not worry about paying late or missing payments.

Types of debt consolidation plans

debt consolidation plans

debt consolidation plans

Debt consolidation is just a generic term to describe a lot of such options out there. It is important to have a lot of options to choose from as each one has its own characteristics. It’s all about you choosing what fits your financial situation and your ability to settle the debts.

  • Debt consolidation companies

Debt consolidation companies have been established to help people get out of debts. The use of a debt consolidation company involves getting a consolidation loan with a new interest rate from them. They give you the loan, you settle your debts and then focus on repaying them as per the agreement put in place. This is a great way to get out of debt. However, there is a catch with this option. You have to be very careful with the calculations that are involved here.

Debt consolidation and the rest of the other options available all depend on your ability to settle your debts, your source of income and how much of it goes into settling the debt. If you miscalculate, then you are in trouble. The interest rate could be set in a place where you realize you haven’t solved anything and in turn it is still hard to keep your head above the water. If you are not careful, debt consolidation may cost you your credit score and get you into trouble in the future.

To make sure all the above don’t happen, consider the time it will take to repay the debt. This will help you determine if, with the combination of the interest rate, debt consolidation will solve your problem. You must also be careful with making punctual repayments. Otherwise, you be forced to pay more than you had expected.

  • Home equity loans    

 Home equity loans

Home equity loans

This plan allows you to use the value of your home to get a loan. This program allows you to get between 75%-80% of the value of the home to help you pay up the debts that you may have. This time, the home is used as a collateral. A home equity loan has fixed terms, that means that the loan amount and interest rate are fixed. The time frame for payment is also fixed.

However, there is a catch. It’s your house which you have used as collateral for the loan. You have to consider carefully before you go down that road, making sure that the debt is worth putting your home on the line.

  • Balance transfer        

You probably have seen the “0% interest” adverts on debt consolidation loans. This is a plan that allows you to get the amount of money needed to settle your debt at a 0% interest rate for a period of time. First, you need to pay between 2%- 5% of the total loan amount. Then, for the next period of time that you are paying 0% interest, you must pay back the installment in full and on time. This period is between 6 months and a year. If you are late or skip a payment, your interest plan is cancelled and you will be charged interest from then onwards. It is also important to check the interest rate charged before you make the decision on taking up a balance transfer.

  • Peer-to-peer lending        

Peer-to-peer lending

Peer-to-peer lending

Peer-to-peer is a plan that allows lending companies to connect you with other lenders. They get you the loan and you pay back slowly with an interest. It is a win-win for both parties as the lender gets steady returns while the borrower gets the money to settle his debts. The loan has a time frame of 3-5 years, giving you enough time to pay up.

Is debt consolidation

Debt consolidation is a great financial decision to make. It gives you the opportunity to shape up financially. It also allows you to concentrate on just one consolidation loan and one repayment amount.

It is important for you to sign up for a financial plan which you can comfortably afford. It’s all good decision making and not getting into more debt after paying off your debt consolidation loan.

 

SHOULD I TRY TO SETTLE MYSELF, USE A LAWYER, OR A SPECIALIST COMPANY?

This question most debtors ask themselves

This question most debtors ask themselves

This is the question that most debtors ask themselves when trying to figure out the best way to go about clearing their debt. Each situation is different and the circumstances of your debt will determine whether you will have to settle by yourself or if you will have to hire the services of a lawyer or the services of a specialist company. Debt settlement is a situation whereby you negotiate with your creditors, using lawyers or specialist companies or by yourself, to have the amount owed reduced.

Hiring a lawyer will come in handy when you need someone to analyze your situation and give you legal advice that is practical. A lawyer will be able to advise you if you will have to settle your debts or file for bankruptcy, depending on your situation. Also, should the creditor sue you, a lawyer will be able to defend your case in court. Ensure that your attorney is licensed and one who values integrity by upholding the ethical standards.

Opt a company to help you to consolidate

Opt a company to help you to consolidate

You may opt to use a company to help you to consolidate your credit card debt and make the process of clearing debt easier. The debt settlement companies require that you pay them a monthly amount while they negotiate with your creditors. The amount that you pay is then divided into savings that will be used in paying off your debt as well as the service fee charged for the work they are doing on your behalf.

When you have a number of credit card debts, you may opt to take a credit card consolidation loan and worry about one payment. When you consolidate credit cards, you will be able to get the lowest interest rates and benefit in making lesser payments over time as compared to paying the credit card debts individually.

The debt consolidation companies will be able to advise you on how to consolidate credit card debt. This will enable you to sort your finances as there will be no more hassle of making multiple credit cards and debt payments and you will be able to possibly increase your cash flow because bill consolidation reduces the monthly expenses.

Hire the services of a lawyer

Hire the services of a lawyer

You may opt not to hire the services of a lawyer, specialist companies such as a debt settlement company or to settle for debt settlement so as to get credit card debt relief.

This may be because you are wondering how you may afford such services yet you are already struggling with your debts. Should you choose to settle yourself, you will have to equip yourself with the knowledge and laws related to debt collection.

It is better to do debt settlement by yourself when you are certain that this is the choice that you will settle for and if your creditors are yet to start suing you for the debt owed.

While considering debt settlement, the option that you will settle for depends on your financial situation. Also, while you may hire the services of a lawyer or specialist companies, be sure to get legitimate ones so that you may not end up losing your money to scams.

WHEN DOES DEBT CONSOLIDATION MAKE SENSE?

Debt consolidation makes the most sense when a consumer is very deep in debt with high interest rates and large monthly payments.  Debt consolidation combined with a debt repayment plan and/or credit counseling can help a consumer pay off all of his debts and be debt free within 3 to 5 years.

Although, this isn’t the case for everyone that is in debt it can offer some relief and give consumers the opportunity to reorganize their finances and in some cases even save a little money.  If a consumer feels that debt consolidation is the best option it is very important that he choose a consolidation company that teaches methods on changing spending habits not one that simply reorganizes the debt.

It is equally important that the counselors work with consumers on maintaining the new habits even for a period of time after the conclusion of the consolidation.

The wrong debt consolidation company will make a lot of promises, but not deliver. They will promise lower monthly payments, lower interest rates and the convenience of a single payment. But, in reality they can be associated with high fees, greater debt and potentially more interest payments.

Things to Consider:

 

Things to Consider

Things to Consider

  1.  Debt consolidation is not a cure all.  The consumer must work on new habits.  It wasn’t the debt that got the consumer in the position that he was in it was the consumer’s choices.
  2. The most expensive service is not always the best service.  A good debt consolidation company will not cost the consumer more in the long run.  A consumer should beware if the company charges hefty fees for their services in areas such as high-interest rates, high upfront fees, and/or high monthly fees.
  3. The consumer will be paying more interest over time than if continuing to make their usual payments.  Consumers need to be careful because lower monthly payments could result in extending payments which can be more expensive over time.

Unfortunately, the prospect of being debt free is highly romanticized and in most cases debt consolidation doesn’t make sense.  Debt consolidation companies are the same as any other financial institution; they are in business to make money.  A few tips for consumers to avoid being taken advantage of include:

Tips for Consumers

Tips for Consumers

  1. Consumers should calculate how much they owe and their current interest rates and then determine how long it would take them to pay off the debts by maintaining their current rates.  Once all calculations are done consumers should compare their figures with the length of time they would be in debt consolidation.  In most cases a lower interest rate is more expensive than simply increasing the current payment.
  2. Consumers should also check to see what the monthly payment on a debt consolidation loan would be.  If the loan payment is more than what the consumer is currently paying it might be more beneficial for the consumer to increase the current payment.  If the loan payment is less than what the consumer pays each month the consumer could end up paying more in interest in the long run.
  3. Consumers should make sure that if they choose debt consolidation that the company will incorporate credit counseling so the consumer can learn how to use credit responsibly once the debt consolidation loan is paid in full.
  4. If the consumer is being pressured into a debt-management plan that he pays through the company he should be weary.
  5. Consumers should watch out for imposters.  Any deal that appears to be too good to be true, it probably is.
  6. Consumers should shy away from companies that promise to remove negative items from their credit reports.  If an item on a consumer’s credit report is true there is no way to remove it.  The only thing that the consumer can do is make it less negative.
  7. If a company promises to eliminate debt through obscure laws it probably is not legitimate.  A consumer’s debt is a legal obligation and it should be paid back.

Mathematics and Behavior Are the Key to Financial Freedom

 

Mathematics & Behavior are key to financial freedom

Mathematics & Behavior are key to financial freedom

Although, it may be very enticing to only deal with one monthly payment it is important for consumers to realize thatthere are instances where they can do the same things for themselves that a debt consolidation company can do for them and be able to save the money they would be paying the company.

The first thing that a consumer needs to do is to create a realistic budget.  The second thing that a consumer needs to do is decide whether to pay the highest interest or the lowest balance debts first.  Finally, the consumer would need to set up auto-pay and pay more than the minimum payment each month.

If a consumer decides that debt consolidation is the best route he needs to be aware of his behavior. Paying off debt with a loan doesn’t eliminate the debt it simply combines it and the consumer is still responsible for it.

Consumers who truly want help should do what they can to get it without worrying about what others may think.  Debt repayment and credit counseling are great resources to assist consumers in negotiating lower interest rates, establishing realistic budgets, and with gaining control of their debt instead of the debt controlling them.

HOW TO FIND A REPUTABLE PAYDAY LOAN CONSOLIDATION COMPANY

There are three common types of debt consolidation:  debt consolidation companies, debt management companies, and debt settlement companies.

Types of debt consolidation

Types of debt consolidation

A debt consolidation company purchases all of a consumer’s debt and the consumer then makes one payment to the company.  The benefit of this is that it sometimes lowers the consumer’s interest rate and combines multiple payments into a single payment.

A debt management company is a third party that attempts to negotiate lower interest rates and payments on a consumer’s current debts. A debt settlement company is a third party that attempts to negotiate lower principal balances on a consumer’s current debts.

Although each of the companies provides very different services they are often confused or jumbled together.  When conducting an internet search for debt consolidation companies there are limited resources that are produced that exclude debt management and settlement companies because they tend to be more risky and often have a negative effect on consumer finances.  Debt consolidation is not without risk but with a consumer’s total debt being purchased and all debts combined into one affordable monthly payment the risk is lower than with other services.

There are methods in which consumers can consolidate their own debts without involvement from a consolidation company but it does require a credit score of 660 or higher anything lower will require the services of a reputable debt consolidation company.

Tips for Finding a Reputable Debt Consolidation Company

 

Tips for Finding a Reputable Debt Consolidation Company

Tips for Finding a Reputable Debt Consolidation Company

  1. Check with the Better Business Bureau.  By checking with The Better Business Bureau consumers may find a lot of companies that are not rated probably because of limited to no available information.However, consumers will be able to see what companies are accredited with the Better Business Bureau, what complaints have been filed against various companies with the Better Business Bureau, and any legal actions that have been taken against various companies.
  2. Check to see what companies are registered with The Association of Independent Consumer Credit Counseling Agencies or The National Foundation of Credit Counseling.
    Reputable companies will make their reputation and customer service a priority and will be associated with some type of governing body.Consumers checking with these two agencies will be able to see what companies are registered as well as any positive or negative feedback associated with the companies.
  3. Consider services through a nonprofit agency.  Just because a company claims to be nonprofit does not automatically make it reputable.  A true nonprofit company will have a 501(c) (3) certificate.  Although nonprofit companies are less expensive they still have to charge for their services in order to stay in business.

Avoiding Scams

 

Avoiding Scams

Avoiding Scams

Although, there is no certain way to determine the legitimacy of a company there are signs that consumers can look for:

  1.  They are selling things other than debt consolidation.  These companies will market themselves as debt consolidation services but once the consumer is in their office they present other services such lowering the total amounts that are owed and working out deals with lenders.  True debt consolidation companies do not negotiate with current lenders they simply transfer a consumer’s debt to a new loan with different terms.
  2.  They are aggressive or pushy.  Anytime a consumer is encouraged to make a rash decision the consumer should have concerns because it is very likely that the company is more interested in profits than what is in the best interest of the consumer.
  3. The company markets a quick fix.  Any company that markets their services as a painless and quick process is simply dishonest because getting out of debt is never quick nor is it without some type of sacrifice.
  4. They make the consumer feel uncomfortable. Consumers considering debt consolidation needs to be comfortable with the companies they have chose because once the agreement is signed it is binding.  A good company will listen to their consumers, be honest with their consumers, maintain the consumer’s best interest, and will educate their consumers on making better financial choices in the future.

How to determine if debt consolidation is the right choice

 

How to determine if debt consolidation is the right choice

How to determine if debt consolidation is the right choice

Despite whether a consumer chooses a for-profit or a nonprofit agency there will be applicable fees because neither agency will lend money for free.  However, reputable companies will be honest about their fees, interest rates, and terms.

  • Fees: a reputable debt consolidation company will be upfront about their fees.  Some charge fees upfront while others simply make money off of the interest paid by the consumer.
  • Interest Rates: most reputable debt consolidation companies will offer lower interest rates than the consumer was paying but it can vary by company.
  • Terms: a reputable debt consolidation company will be upfront about the terms they offer consumers by disclosing interest rates, the length of the services provided, and will disclose if the consumer is going to be paying more in fees and such than simply attempting to take care of the issues personally.

Prior to making such a large decision consumers should weigh the positives and negatives of debt consolidation to determine if it is an answer to a problem or if it will create a bigger problem. This option should only be considered if it is truly a means to an end. If the consumer is going to continue being in debt after the consolidation has ended this is not an option to consider.

Locating a reputable debt consolidation company is possible but at the same time it is difficult because there are many more disreputable companies than reputable ones. It is more important for consumers to do their homework and make a good decision than to make a hasty decision that is regretted later.

ALL ABOUT PAYDAY LOAN CONSOLIDATION

How does payday loan consolidation work?

How does payday loan consolidation work?

How does payday loan consolidation work?

Payday loan consolidation occurs when a borrower has all of his payday loans combined into one loan so that there is only a single monthly payment.  Once the borrower has chosen consolidation company a representative from that company will meet with the borrower to discuss monthly income and expenses and then help the borrower determine the amount of money that needs to set aside each month.

The borrower will then begin to deposit the amount determined into a savings account that is opened and managed by the consolidation company.  Once the savings account reaches a certain balance the consolidation company will start to negotiate with the payday lenders on the borrower’s behalf in order to get a single monthly payment that is manageable for the borrower.

From start to finish a payday loan consolidation can take anywhere from 6 – 18 months depending on the following variables: how many lenders the borrower owes and the borrower’s monthly income and expenses.  Although, there isn’t a magic wand that a borrower can wave to determine if a payday loan consolidation is right for him there are questions that the borrower can ask himself to determine if consolidation would possibly benefit him:

  1. Can the borrower repay the payday loans in full within the next 2 – 3 months without disturbing his budget?
  2. Can the borrower completely eliminate the need for payday loans within the next 3 months?

If the answer is no to either of the questions payday loan consolidation could possibly benefit the borrower.

However, before making the decision to utilize a payday loan consolidation company the borrower needs to be aware of the following facts:

 

Borrower needs to be aware of some facts

Borrower needs to be aware of some facts

  1. It’s a third-party payment system: The consolidation company does not make loans or settle a borrower’s debt.  They simply act as a middleman to negotiate for the borrower and distribute funds to the borrower’s creditors until the creditors are paid in full.
  2. Payday loan consolidation companies range in quality:  There are organizations that are designed to govern such companies such as the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) to ensure that these companies follow certain standards set forth by the Council on Accreditation including employee training and certification protocol but it would still be wise to be picky.  A reliable company will be well organized, make timely payments on the borrower’s behalf, send statements to the borrower in a timely manner, and offer strong borrower education and support.
  3. All plans are created equal:  Financial institutions don’t provide preferential treatment all plans are structured the same way.  The consolidation representative will determine with the borrower what it will take for the borrower to fully repay his creditors in three to five years.  The standard payment is typically based on 2.5% of the total amount owed but under some extenuating circumstances other arrangements can be made.  The positive thing about these plans is that the borrower can pay more than the agreed upon amount when he has extra funds in order to get out of debt faster.

    Counseling before consolidation

    Counseling before consolidation

  4. Counseling before consolidation:  Before jumping into consolidation a borrower should attend financial counseling to ensure that all other alternatives have been exhausted and that the borrower will have enough money remaining in his budget to pay his basic expenses.   If the borrower has enough money left over after subtracting expenses from income consolidation as well as other options will be presented to the borrower.  A good counselor will be knowledgeable, compassionate, and encouraging to the borrower. Therefore, if a borrower is presented with a counselor who acts bored, judgmental, or pushy it would be advisable for the borrower to request a different counselor.
  5. Consolidation is not right for everyone:  The majority of the borrower’s balances should be in unsecured debts such as credit and charge cards, personal loans, and sometimes collection accounts.  If the majority of the borrower’s debts are associated with taxes and/or child support these plans would be of no help.
  6. Consolidation is simple, steady & efficient

    Consolidation is simple, steady & efficient

    Consolidation is simple, steady, and efficient: When a borrower is on a consolidation plan payments remain the same for the duration of the plan and he never has to wonder about the amount he is paying each month.  Also, once consolidation begins calls from creditors usually end.

  7. Record maintenance isn’t over: Despite the consolidation agreement creditors will continue to send borrower’s account statements that the borrowers will have to monitor and possibly even send in.  Agency reports will not reflect accruing interest so if the borrower fails to submit them the agencies balance will be drastically different from the borrower’s bank statements.  This can leave the borrower in mound of debt even after the consolidation services have ended.
  8. Charging must stop until the consolidation is paid in full: A common agreement with all consolidation companies is that borrowers must close all accounts and not open any new ones until the borrower is debt-free.
  9. Consolidation is not the same as bankruptcy:  Although borrowers are paying their debt in full lenders may still have a negative view on the service and the borrower’s credit report could still take a hit.  Some creditors will notate that the debt is being paid through a third party which can be viewed negatively as if the borrower needed help paying his bills.  Other creditors will look at consolidation as a positive thing because the borrower is making consistent and timely payments.

Clearly payday loan consolidation has positive and negative factors.  It is important for the borrower to determine if this option is going to be a good decision or not and act accordingly.  The one factor that is advisable prior to making any decision is that the borrower gathers as much information about his finances and options as possible to avoid making any hasty decisions.

HOW CAN PAYDAY LOANS BE IMPROVED?

In this day and age most people live paycheck to paycheck and have to become pretty creative when it comes to stretching their incomes and saving for emergencies and retirement.  For some people payday loans are as necessary as public assistance is to the poor in order to make it through each pay cycle and they have no other alternative to keep their heads above their needs and finances.

While payday loans do have their benefits for those who depend on them they also have their disadvantages for those same people.  Payday loans often have high-interest rates, high fees, lender favored contracts, and sketchy collection practices.  All of the disadvantages have the potential for improvement.  

The first area for potential improvement is the interest rates that are charged.

The first area for potential improvement is the interest rates that are charged.

The first area for potential improvement is the interest rates that are charged.  The interest rates charged by payday lenders are often pretty high.  In fact, in some instances they are as high as 400%.

If payday lenders were to lower their rates to where they were only slightly higher than those of banks it would not only benefit their consumers but it would also benefit them by attracting a more diverse group of borrowers.

A reduction in interest rates would affect the profits received by lenders but at the same time it would open new doors for the lenders by widening their potential customer base.

When a potential borrower does an internet search for payday lenders more negative information is available than positive, which is a deterrent for most people needing to borrow money.  However, if the financial terms were updated and changed to be more borrower friendly there is likelihood that more potential borrowers would consider a payday loan more often than just as their last option.

Fees associated with payday loan

Fees associated with payday loan

The second area for potential improvement is the fees associated with taking out a payday loan.  If lenders were to have set loan fees it would better enable customers to determine the cost for them to borrow money and could help them in their selection of a financial institution.

Potential borrowers that are on the fence about payday loans are naturally going to be more skeptical and conservative in their decisions regarding lenders than established borrowers.

Although it is nice for lenders to have return customers at some point these customers are going to have a change in circumstance that either eliminates the need for a payday loan or the borrower’s eligibility for a payday loan.  Therefore, an essential part of a lender staying in business is to bring in new borrowers.  One way that this can be done is by creating a customer loyalty program.

Many lenders already have a referral program in which established customers can receive a discount or free transaction when a new customer is referred and takes out a new loan.  In order to take this program one notch higher lenders could reduce fees and interest rates for loyal customers who have a good payment history with them.

Traditional lending institutions have had these types of incentives in place for years so it’s time that payday lenders educate themselves to the tactics and techniques of traditional lenders and utilize some of the same measures they use to draw in new borrowers.

lender favored contracts.

lender favored contracts.

The third area for potential improvement is lender favored contracts. Payday loan contracts almost always favor the lenders.  The repayment terms for payday loans are often predetermined and pre-set by the lenders with very little input from the borrowers.  Most if not all payday lenders have a one size fit all type of contract meaning that they use the same contract for every customer.

Regardless of whether or not the customer is a new or return customer or the customer’s payment history payday loan contracts don’t vary between good and bad customers. In relation to contracts are the collateral practices of lenders.

The majority of lenders require borrowers to present the lender with either a post-dated check or bank account information in which payment is withdrawn from the borrower’s account on a date chosen by the lender.  Improvements can be made in this area as well by possibly allowing borrowers to choose their own repayment dates or giving borrowers a grace period to repay their loans prior to drafting the borrower’s accounts.  Another possibility would be to allow borrowers to use another form of collateral such as a title, some type of electronic, jewelry, etc.

The fourth area is collection practices.

The fourth area is collection practices.

The fourth area for potential improvement is collection practices. Many lenders are not clear about their collection practices prior to borrowers signing their loan agreements so they are confused when lenders begin collection procedures.

It’s not uncommon for some payday lenders to use tactics such as calling borrowers employers and family members and threatening to have defaulted borrowers arrested.

Although these tactics are not used by all lenders they’re not unheard of. An improvement can be made in this area by making borrowers aware of collection practices prior to signing the contract.

Payday lenders are hero’s to a lot of people who are faced with financial crisis. Although these services are helpful to a lot of people there is a great deal of room for improvements.

Any and all improvements could be beneficial to lenders and borrowers. If payday lenders would consider reevaluating their practices they would be more widely accepted, looked at more favorably, and would make them more competitive with other lending institutions.

WHEN PAYDAY LOANS BENEFIT BORROWERS

In the midst of a financial crisis a payday loan can help cover an emergency and/or necessary expenses.  They offer numerous benefits:

Payday loans expenses

Payday loans expenses

  1. Payday loans are easy to apply and qualify for: The majority of lenders have simple approval policies with few limitations.
  2. Payday lenders safeguard borrower’s personal information:  Lenders are diligent with their record maintenance and security and do not give or sell borrowers personal and financial information to other companies.
  3. Payday loans are quick: The application and approval process only take a few minutes.  A lot of lenders offer a one-hour guarantee once a borrower is approved.
  4. Payday loans are flexible: They are typically short-term so that borrowers can repay them quickly and easily.
  5. Payday lenders limit loan amounts: The amount of money that a borrower is approved for is often directly related to borrowers’ earnings. Typically lenders will base the amount of money loaned on a percentage of the borrowers’ income in an attempt to make it easier for the borrower to repay the loan.
  6. Payday lenders are governed by legislation in most states: Many states have laws in place that prevent lenders from charging excessive fees and interest rates in order to protect borrowers from price gouging.
  7. Payday loans are typically unsecured and don’t require collateral: Payday lenders typically don’t require an explanation of what the loaned money is going to be used for and generally don’t place restrictions on the use of the loaned money.
  8. Payday loans are convenient: Payday lenders often have different business hours than traditional lenders and are open outside of traditional lending hours allowing borrowers access to emergency cash both in person and online.
  9. Payday loans are invaluable in times of financial emergencies: Payday loans are often available to the borrower in less than an hour after the approval of the loan so there is limited waiting on needed funds.
  10. Payday lenders are limited as to the amount of interest they can charge: Most states place a cap on fees, the amount of interest, and other charges lenders can charge for a payday loan.

Regardless of the topic or issue everything has advantages and disadvantages. Sometimes the advantages outweigh the disadvantages and other times disadvantages outweigh the advantages. Fortunately, with payday loans the advantages outweigh the disadvantages.

Disadvantages to Payday Loans:

 

Beware of fraudulent online lenders

Beware of fraudulent online lenders

  1. Payday loans are for short term needs only. Borrowers who need larger amounts of money for longer periods of time will not benefit from a payday loan.
  2. Payday loans involve fees and interest payments. The charges associated with a payday loan are a bit higher than traditional bank loans.  Inability to repay a payday loan by the maturity date can result in charges and fees that are doubled.
  3. Payday lenders require a borrower to be employed full time.  Potential borrowers who are only working part time, receiving unemployment benefits, or receiving welfare will more than likely be ineligible for this type of loan.
  4. Payday lenders require borrowers to have a current bank account.  Potential borrowers that deal with cash only will be determined to be ineligible for this type of loan.
  5. Payday loans are for relatively small amounts.  Most payday loans are approved for $1000 or less. Potential borrowers in need of larger amounts of money will be required to seek other alternatives.
  6. Possible fraudulent online lenders.  Potential borrowers contemplating applying for an online payday loan should research the company they are planning on borrowing from to make sure that the lender is reputable and trustworthy.  There are dishonest lenders that sell borrowers information.

Adair Morse, an assistant professor of finance at the University of Chicago, conducted the study “Payday Lenders: Heroes or Villains?” which determined that payday lenders benefit communities struck by natural disasters.  Morse study assessed the impact that payday lenders had on communities affected by a natural disaster by looking at four areas of community welfare: birth rates; death rates; drug and alcohol treatment rates; and foreclosure rates.

Morse study revealed that the presence of payday lenders in the disaster-stricken communities increased welfare in all four areas more so than traditional financial institutions.  Although the traditional financial institutions did somewhat benefit the disaster-stricken communities they were not able to provide the same level of services that payday lenders did.  Morse has indicated that this same principal can be related to people who are in a financial crisis.

Living paycheck

Living paycheck

Living paycheck to paycheck is nothing new to millions of middle-income Americans who juggle whatever they have to in order to meet their financial obligations. However, when unexpected expenses come up their budgets are thrown off and the need for financial assistance becomes inevitable.

Although some will turn to friends and family to get them through the crisis others will not have the available support system in order to do so and will require outside assistance or face having their electricity disconnected, their vehicle repossessed, their home foreclosed on or being evicted if they rent.  To those who have a limited support system payday lenders offer something they can’t get anywhere else, a friendly face and solace in the eye of the storm.

Payday loans aren’t always the perfect answer to a financial crisis but at least they are an option for those who have limited options. There are borrowers and lenders alike who abuse this option but at the same time there are borrowers and lenders who do not.

It would be incorrect to group all payday lenders in a single group and all payday borrowers in a single group.  As with all walks of life there are just as many honest lenders and borrowers as there are dishonest borrowers and lenders. To say that all lenders are dishonest and take advantage of their borrowers would be as much a misrepresentation as saying that all borrowers default on their debts and therefore can’t access traditional forms of credit.

THE EFFECT OF DEBT SETTLEMENT ON CREDIT SCORE

Common Myth

Common Myth

The common myth is that a debt settlement has no effect on a debtor’s credit score. Contrary to the myth surrounding debt settlement, debt settlement may affect your credit score. However, the impact may be negative or positive, depending on various conditions that may be in the present or future instances. Your credit score reflects if you have paid the debt owed as per the original agreement with your lender.

A debt settlement, on the other hand, negates or modifies the credit agreement. Therefore, this will possibly affect your credit score and a potential creditor will take note of the accounts that were closed by your previous creditor closed an account due to such changes brought about by debt settlement. The following are some of the factors that influence the impact that debt settlement has on your credit score:

  • the present condition of your credit
  • your creditor(s)’ reporting practices
  • the amount of debt being settled
  • if your settled debts are in good standing at that moment
  • reduced amount by which the original balance of the debt was settled for.
Debt settlement programs

Debt settlement programs aim

However, in some instances, it will be beneficial to settle your debts. This is when you factor in the opportunity cost of not having debt settlement and having your credit score affected. An example of this is when you have a situation in which you continuously submit payments late or default on the payments.

Therefore, it would be better to have a debt settlement company assist you in sorting your financial issues as not doing so in the present will lead to a bad credit score in the future. Debt settlement programs aim to reduce the amount of debt attached to your name and in so doing, this will be able to assist you if your credit score is already lowered due to late payments. Settlement of debts may be the much-needed relief that you will need to manage your finances.

A point to note is that debt settlement is suitable for large amounts of debt. This is because the larger amounts of debt have a greater impact on your credit score. If you settle the smaller amounts of debt when you have a larger amount of debt, this debt settlement will negligibly affect your credit score.

Therefore, when you feel that you are stuck in your finances and would like to improve your credit score, you will need to consider the factors that influence the impact that debt settlement has on your credit score as well as the opportunity cost of not having a debt settlement program.  At times, it would be better to have your consumer credit report reflect a debit account as ‘paid-settled’, especially if this will do away with severe delinquency.