Credit can be described as the provision of a loan in terms of cash or property from one person to another where the second person cannot return the loan to the lender immediately instead he or she plans to pay back the loan on a later date and thus generates a debt. There are many types of credit but here we are going to look at pay day loan and title loan credit. The issue The issue here is to have a look at the title and pay day loan consumer credits and analyze whether or not these types of credit are helpful to consumers.
This is a very important issue in macroeconomics simply because it enables individuals and big companies or institutions to make informed choices before making any transaction related to these types of loan. The major opponents of these types of loan are the consumers borrowing the loan while the major proponents are the lenders of the loan such as banks and insurance companies. We are going to see one of these types of loan Payday loan. Pay day loan is a small short term loan that is aimed at covering the expenses of a customer until he or she gets the money when the payday arrives.
This type of loan is also called payday advance; sometimes it is referred to as cash advances even though the term also refer to cash given against credit cards. A pay day loan may appear like a quick and readily available means to get your financial aid. But this is not the case according to the consumer credit counselors. In fact the counselors are cautioning consumers to be wary of this loan because they can worsen the already terrible financial situation of the customer. Consumers are being educated by consumer credit counselors on the appropriate method of budgeting and on the ways of avoiding more incurrence in debt.
How payday loan work. Payday loan companies may seem enticing to those who need cash to meet urgent needs such as hospital bills, electricity bills, insurance premium and many more. To get this loan all you need to provide is a valid identity card, a post-dated check, and a job identity card. The repayment period is usually within a period of seven to thirty days depending on the amount borrowed. The requirement is that the check is written for the amount of cash borrowed and a processing fee is included on top of this. Failure to repay all the amount within the specified period will definitely lead to very heavy penalties.
Consider the following scenario: You go and borrow $200 being aware that you will pay back this amount when your payday arrives say in two weeks time. The pay day loan company will charge you $50 in interest. When the payday finally arrives, you realize that you still don’t have enough cash and you are unable to pay back your loan fully. Therefore you will request for extension of the period which will be given but an additional interest rate is charged. Finally you will realize that you have to pay a total of $250. When this is expressed as percentage rates per year over a two-week period:
• $200 — Amount of the loan • With a $50 interest fee added = 525% APR • In the case where extension is requested and a lateness penalty of $55 is applied on top of the loan and total interest = 1180% APR. It is very clear from the above scenario that this type of loan is actually uneconomical. Summary Below are the main disadvantages of using the payday loan: • Use of payday loans is one of the causes of financial difficulties for families and individuals. • Using these loans increases the chance of losing a bank account
• Payday loan customers who also have credit cards are most likely to become delinquent on the card. • Payday loans have very high chance of causing defaults in the first year of use. • Using payday loans causes customers to file for bankruptcy in their future. A research that was conducted by Colby College researcher showed that pay day loan customers are worse off than those with no access to this loan. Conclusion Be an Informed Consumer The consumer credit counselors’ advice is that before engaging in any type of financial contract, you should first get to know the rules and regulations of the contract.
According to the Lending Act, loan lenders are suppose to disclose all the terms and regulations regarding the loan they are lending to consumers. Reference: Malcon, H, (1992), Consumer credit counseling, Europe: Poptel Penelope. H, (2003) “Cost, Volume and Allocation of Consumer Credit. South Africa: (Pty) Ltd. McQuid M (1997). Consumer Law in South Africa: SA: Juta Rust, K. (2002) “Competition or Cooperation: Realising access to housing finance in South Africa. SA: HFRP’s Occasional Paper.