When you are thinking of getting a payday loan to cover for a cash shortage, one of the things that you should consider is how you would be pay back the loan. You have to jump ahead and consider that. It would be a mistake to use a payday loan without a clear-cut plan on how you will be paying back the full amount. Failure to consider that could lead you to end up in financial trouble.
Payday Loan Basics
Before we think about how you are going to pay back a loan, we need to discuss first what a payday loan is and how it works.
A payday loan is a short term loan that usually lasts for two weeks or a month. The amount that can be borrowed under this method is normally limited by how much the borrower is earning. It should never exceed the amount that the borrower would get from his/her paycheck. Because it is a short term loan, it is supposed to be paid back in full, including the fees incurred once the borrower receives his/her paycheck. This method of borrowing is intended so that a consumer could make it through until the next payday.
Payday lending is not new. A few years ago, lenders normally operated from brick and mortar branches where they dealt with borrowers personally. The lenders would walk in to the branch, file for an application and submit the needed documents. But recent changes in technology have affected the way that many short term lenders operate. The most significant development is the internet. With the development of the internet, lenders are now able to operate entirely online. The borrower no longer has to visit the office of the lender. All that is needed now for a consumer who would like to take out a payday loan is to use the online application forms.
Because of the internet, the speed by which consumers can get the money that they need has been made faster. Now borrowers can count on getting the money that they need within hours after they have applied.
A consumer is just required to provide several pieces of information when applying for a loan. That would include the full name, age, employee information and bank account information. Payday lenders do not run credit checks in the same way that banks and other traditional lenders do so, so even those with bad credit standings can borrow from them.
Repayment of Payday Loans
Though payday loans do not require a lot when it comes to qualifying for one, payday lenders have taken some measures to ensure that they will be paid back. In the past the most common method of repayment would be to ask the borrowers to issue post-dated checks. These checks would pay for the loan and the fees. When the lender has the money to pay back the loan, he/she can just deposit the amount and let the lender cash the check or they can pay the lender directly and then get the check in turn.
With the introduction of online processing, payday lenders have also started offering a different method of repayment. Most online payday lenders now use bank accounts that can be accessed through the internet. If in the past, having a checking account was one of the major requirements, now it is these online accounts that they are looking for.
Automated Clearing House
Many payday lenders use ACH or Automated Clearing House as a method of payment. It would be a good thing for you to understand what is involved in this method of payment. ACH is a method of EFT or electronics fund transfer. Payday lenders are not the only ones that use it. Most companies that deal with automated payment use ACH. This system is run by the National Automated Clearing House Association. Government agencies and businesses are using ACH at an increasing rate as a means of processing payment. It is not surprising that payday lenders have switched over to its use as well.
The processing of loan payments is just one aspect of ACH. In 2012 alone, the system handled transactions that were valued at more than $36.9 trillion.
Payday lenders use the ACH system under direct debit. Direct debit is a transaction under which one party can withdraw directly from the bank account of the other party as payment for goods or services rendered. The actual transaction is done between the banks of the payee and the payer. In order for it to push through the payer must give authorization first for the payee to process a certain amount from his/her bank account. When this permission is given, the transaction itself is done electronically.
Continuous Payment Authorities
Another method of payment that payday lenders use is the CPA or continuous payment authorities. A CPA might seem like a direct debit and that is why many people confuse it with the other method. But a CPA can lead to more problems. Under a CPA, a merchant or a lender can take money out of your account whenever it wants to do so. Basically, you are giving them a freehand with your account. Many payday lenders have abused this authority and access and this has led many borrowers to fall into bigger financial ruin than before.
Under a direct debit you are allowing a lender to take out either a fixed or a variable amount of certain dates. You have the power to cancel the payments by going online or you can just tell your bank to do so. Under a CPA however, things are a bit different. Though you are also authorized to cancel the payment transactions, some banks do not recognize this and the lender can keep on taking out money from your account. Under a direct debit, the bank will also provide you with a full refund in case there are problems. You don’t get that with a CPA.
How do you know that a lender is processing a CPA instead of direct debit? When they ask for the long number in front of your card instead of the bank account number, that’s a sign that they are processing a CPA. It really is tricky to spot if you have set up a CPA and getting it cancelled can even be trickier.
Take My Money
Many borrowers have had problems with continuous payment authorities. It is like telling a lender to take money from your account whenever it feels like it. For many payday lenders that can be a dangerous situation. Remember that many of those who use this kind of loan are on limited income and if a lender who uses CPA turns out to be unscrupulous and keeps on taking out payments then that can spell more financial trouble for them.
But these unscrupulous lenders do not take out money just like that, without any reason for it. In many cases the borrowers give authorization for the lenders to take the money from their account for the payment of their payday loan plus the fees. Their understanding is that it would just be a onetime payment, but some lenders would instead take out only a portion of the loan and then charge the fee for that period and they would do that for several months.
For example a borrower took out $200 with a fee of $30, some payday lenders would take out only $50 and charge the full fee of $30. They would do so for 4 months until the whole loan has been paid off but by then the fee has reached $120. Not all payday lenders do that, but there are reported cases of that happening and getting the CPA cancelled is an uphill struggle for the borrowers.
Avoiding CPAs Altogether
The best thing for you to do is to avoid taking out payday loans where CPAs would be the method used for payment. Unfortunately, some lenders use that as the only option for repayment. The bigger the company the lesser the chance that you will have problems with CPAs, but it does not eliminate the risks completely. There good news is that there are more payday lenders now that have switched over to the use of direct debits.
We have mentioned before that you have rights to cancel CPAs and stop the flow of payment. Unfortunately, some banks choose to ignore this and so consumers are stuck with the deal. You can start by telling the payday lender to stop the process. You can offer to pay them through some other means. The next step is to tell the bank to stop the payment. Tell them that under the law, they are obliged to cancel transactions when you tell them to. You can in fact any money that was taken out of your account after you told the bank to cancel the payments but they failed to do so.
These are the different methods for repayment used by payday lenders today. Now you know what to look out for.