As a result of increasing unemployment and an increase in the cost of living, more and more people are using non-bank financial tools, such as high-interest short-term loans, commonly known as “payday loans”.
What is payday pay?
The applicable legal regulations do not define in any way short-term loans, commonly called payday loans. It is assumed that we are dealing with a payday loan when concluding a loan agreement, assuming repayment of receivables within a maximum of 30 days from the conclusion of the contract.
The status of payday loans is also maintained by a loan originally concluded for a short period but extended at the client’s request (for an additional fee).
Payday loan – how does it work?
Enterprises operating on the market offer their clients products that do not require a banking license, i.e. loans granted from the company’s own funds. On the other hand, loans are a financial product reserved only for banking institutions.
Loan companies conclude contracts with their clients with a minimum amount of formalities and without a thorough analysis of their creditworthiness.
Therefore, the main clients of companies offering short-term loans are people with limited creditworthiness who are not able to take out a loan or bank loan. Due to a cursory assessment of the customer’s creditworthiness or lack thereof and the related high financial risk, parabanks grant loans at a very high interest rate. What is very important, in the case of loan companies, there is no limit in the form of the “maximum allowable interest rate”. In practice, it often reaches several thousand percent per year. In addition, loan companies sometimes give up nominal interest for commission charged for granting a loan.
Therefore, people in debt, without stable sources of income and repayment options should beware of payday loans. For people with fixed incomes and the ability to analyze their own capabilities, such products can, however, be a very useful financial tool.
Payday loan and legal acts
Short-term loan agreements are considered based on the Act of May 12, 2011 on consumer credit, in accordance with the principles of granting a loan and obligations of the lender.
Where to take a payday loan?
Various financial institutions, both banks and savings and credit unions, as well as non-bank entities not controlled by the Polish Financial Supervision Authority are authorized to grant short-term loans. Observing the dominant trends, however, it can easily be seen that payday loans are the domain of non-bank institutions.
Payday loans can be concluded directly at the lender’s premises and remotely – by phone or via the online form.
Costs associated with taking a payday loan
In the face of a particularly difficult financial situation, consumers choosing a lender pay attention primarily to the possibility and time of obtaining the requested amount, forgetting about the costs they will face in the short term.
When deciding to take out a non-bank loan, remember the basic rule: Fast money is expensive money.
In the case of payday loans, fast money is simply unbelievably expensive.
The commission for granting a loan for one month can be up to 40% of the value of the capital borrowed. The actual annual interest rate (APRC) ranges from several hundred to several thousand (in some cases even tens of thousands) percent. In addition to the costs associated with interest and commissions, the consumer is also required to pay fees for any extension of the loan repayment period and recovery costs in the event of default.
To sum up, skilful use of the opportunities offered by non-bank loan institutions can be for many of us an ideal solution to temporary financial problems. However, lack of sense in taking further “payday loans” may significantly increase the debt and enter the spiral of debt.