The new Credit Card Reforms, known as the CARD act, implemented on February 22, 2010, enforces some stringent rules on credit card companies to protect consumers from ambiguous credit terms, fluctuating interest rates, and uninformed decision making. With these changes in effect, banks will focus on lending to those with near-perfect credit, possibly causing consumers with not-so-perfect credit to seek alternative types of loans such as payday loans.
If regular consumers are finding it difficult to make ends meet in between paychecks without the ability to apply for traditional loans, they may have to turn to payday lenders who offer an easier and faster way to obtain quick cash. This is evident in the increase in earnings by Texas-based cash loan company which had doubled their fourth quarter earnings to $33 million and another advance company who had tripled their earnings to almost $20 million.
The new credit card reforms, effective in early 2010, prohibits credit card companies from sporadically increasing high interest rates to consumers, however, it does not fully prevent other types of fees such as zero balance and inactive card fees. Because of this, credit card companies will increasingly tighten up lending to customers, especially those with poor credit history, to reduce lending risks, especially when charging higher interest rates to paying consumers are not an option for recouping losses. This is why payday loans seem like an attractive alternative.
Payday loans are short term, small cash loans, usually between $100 – $1000, granted to consumers with the loan due date being the next pay date, although some payday lenders allow for due date extension. The advantage of payday loans, relative to traditional loans, are that they are much easier to qualify for and faster to obtain with some payday lenders offering an online service where one can apply for and be approved for a payday loan online.
Traditional bank loans and credit card criteria usually require a higher credit score and clean credit history in addition to a longer employment history (usually a minimum of two years), and housing history (also a minimum of two years). With payday cash loans, the usual requirement is employment with income enough to substantiate repayment.
Because of the ease of obtaining payday loans, they are considered high-risk loans which are reflected in larger interest rates ranging from 15% – 30% with APR ranging from 300% – 800%. Hence, those who get payday loans are advised to pay them off during the first due date as to not incur late payment penalties or loan extension fees.
With payday loans, just as with credit card debt and other types of loans, if consumers are well-informed of the pros and cons of terms, they will be better able to make the right decisions.