The New Generation of Payday Loans
Around 12 million employees take out a payday loan each year. The average annual salary of these employees is $30,000. With these statistics in mind, it’s easy to see that the employees who need this emergency money are the ones who are often struggling hardest to pay it back — in fact, predatory lenders have been known to target them specifically. It’s time to think about the new generation in payday loans and why these are just as dangerous.
As technology continues to disrupt several sectors of our day-to-day lives, Silicon Valley has come to disrupt and rebrand payday loans.
A new crop of financial apps allow consumers to borrow small sums of money until they get paid, and withdraws the amount directly from the borrower’s bank account when their wages are deposited. Like traditional payday loans, payment is due in full on the borrower’s next payday.
Marketed toward low-income individuals and millennials, who face unique financial struggles, these apps brand themselves as a way to provide access to money as soon as the user has earned it.
The app knows the user’s wage and uses location tracking to determine how often the borrower is at work. With these variables, the app calculates the amount of money the user is allowed to borrow.
Instead of interest or origination fees typically charged by these types of loans, the user can leave a “tip” to cover borrowing expenses. While these tips are considered optional, users face restrictions if they don’t leave tips.
While perhaps not as predatory as payday loans of the past, these apps expose users to a variety of new vulnerabilities. Direct access to users bank accounts which increases the possibility of hacking, and use of location tracking technology poses a variety of questions surrounding privacy.
What is a Payday Loan?
The definition of a payday loan is not set in stone, but usually the term refers to high-cost, short term loans. The full amount of the loan comes due on the employee’s next payday. Some typical features of a payday loan include:
- Payday loans are usually for small amounts ranging from $300 – $1000.
- The payoff is usually required as a single payment in full on the next payday.
- At the time of taking out the loan, the employee usually provides a post-dated check for the full balance.
- When employees fail to make the full payment on time, the lender can cash the check.
- In some cases, loans can be rolled over or renewed to continue the debt.
How Can Payday Loans be a Money Trap?
For employees borrowing cash in an emergency, a payday loan may sound like a good idea. But for those who are already struggling with debt, this small loan can be a financial trap that is extremely difficult to escape from — and predatory lenders don’t hesitate to take advantage.
The biggest problem with traditional payday loans is that borrowers can rarely afford to pay the money back when it’s due. Loan debt is hard to escape, and when they do manage to pay it off, they are left with insufficient money in their checking account to pay for their day-to-day expenses.
To make the situation worse, payday lenders typically won’t accept partial payments or long-term payment plans. Borrowers are forced to pay off the full amount of the loan on their next payday. Borrowers who are unable to do so face bank charges, or they may have to take out a new payday loan with a higher fee.
This forces borrowers into taking out continual loans – but as borrowers can only afford to pay off the fees, the actual loan amount never decreases, so they are never released from the debt trap. The payday lender has forced them into a cycle of long-term debt.
What is Predatory Lending?
Advertisements for payday loans make them look so convenient and easy to repay. The truth of the matter is that in too many cases, this type of loan is provided by a predatory lender. A predatory lender is a person or organization that loans money at an excessive,
unreasonable expense to the borrower. Predatory lending services often target vulnerable people, such as:
- Retired people
- Military personnel
- Low-income employees
- The unemployed
- Borrowers with credit problems
- People who need cash for an emergency
Predatory lenders attract borrowers by offering immediate loans without having to make a credit check. It’s easy to see the appeal for someone who needs money fast to pay for car repairs, medical bills, or their rent.
Often, predatory lenders make it difficult for the borrower to see how much the loan repayment is actually going to cost them. Lenders are legally required to state the loans APR and fees up front, but predatory lenders avoid doing so. Many borrowers are unaware of these requirements or do not understand the confusing paperwork they have to sign— and regulations aren’t enforced to prevent this issue.
What makes this type of payday loan so difficult to repay is that many predatory lenders charge high annual percentage rates, which are typically in excess of 100%. Charging such excessive fees over a short period of time (usually one month) can make it very difficult for borrowers to pay back the loan. When a borrower is unable to make the payment on time, often a predatory lender will offer to roll over the loan or to give a new loan to pay off the previous one. Either of these options traps the borrower in a long-term cycle of debt which soon becomes insurmountable.
How TrueConnect Works
Borrowers who need money in a hurry now have access to a variety of options.
TrueConnect offers a solution to help employees who are struggling with a financial emergency. TrueConnect offers employees an easy way to borrow money, as well as a practical and responsible way to pay it back. What’s more, it doesn’t cost employers a penny.
TrueConnect makes this type of loan available so that employees can improve their financial wellbeing during a crisis, if they can’t get a conventional loan, without having to resort to predatory lenders.
Many available loan services and employee benefit programs have a complicated application, a long wait time and have hidden fees and penalties. All of this can have a negative impact on an employee’s financial wellbeing in the long term. The team at TrueConnect believes in helping employers provide their workforce with access to safe and affordable loans, without the company having to incur any cost.
TrueConnect offers employee loans up to $3,000. Employees can apply online and know if they are approved right away. Funds are transmitted directly into the applicant’s bank account and can be available as soon as the next business day. The loan is repaid by means of small, automatic payments which are deducted from payroll.
The Benefits of TrueConnect Loans
TrueConnect loans have many advantages over traditional payday loans. These include:
- Simple application process
- No hidden fees
- The same rate for all employees
- A streamlined repayment plan
- Everything is strictly confidential
TrueConnect also helps to improve employees’ financial wellbeing by giving borrowers free access to six financial counseling sessions. These teach employees strategies to help them manage their money and prevent financial crises down the road.
Why Choose True Connect?
As an employer, you care about your employees’ health and happiness. When employees are stressed about their finances, they are unhappy and less productive at work, they tend to have more time off, and stress gradually begins to affect their physical and mental health. Providing employees with payroll loans via TrueConnect can make the difference between financial freedom and a spiraling cycle of debt.
You can rely on TrueConnect because we use a patented method of loan repayment using automated technology. This is designed in cooperation with consumer advocacy groups and run in cooperation with a leading community development financial institution (CDFI).
TrueConnect can fulfill employees’ emergency financial needs while simultaneously protecting them from predatory lenders and unnecessary debt.
TrueConnect is a voluntary benefit aimed at helping employees with their personal finances at no risk to qualified employers. TrueConnect loans are available to more than 1,200 employers throughout the United States. The loans provide a safe alternative to traditional payday loans, and meet and exceed all regulatory requirements for consumer bank loans. Contact TrueConnect today and protect your employees from predatory lenders while helping to improve their financial wellness.