In the past few years, times have gotten challenging for the average working-class American. The banking crisis, a recession, job losses, changes in healthcare and tax requirements, as well as a number of other factors, have led to a dwindling middle class. More and more working class Americans are relying on credit cards, loans, and other temporary measures to get through difficult economic times and lenders are taking advantage of the situation in which demand exceeds supply.
Unfortunately, this model of doing business may seem helpful on the surface, but is designed to keep middle-class people stuck in a cycle of paying off interest rather than debt. It also often leaves those below the poverty line seeking help from all the wrong places.
Bad Credit Financing: The Good, The Bad, And The Ugly
Although there are a number of good and reliable companies, things such as credit cards, payday loans, and home and car loans for those with bad or no credit come with interest rates as high as 400%. In some cases, the terms of financing designed for those struggling financially are worse than what one would see from a local neighborhood loan shark.
While visiting a loan shark is a foray into criminal activity, those lending to desperate Americans at rates of interest and payment terms that count on the borrower not being able to meet the burden of on-time payments has gone largely unchecked. Sadly, it has also driven many into default, repossession, and bankruptcy. However, in 2008, things began to change when the bottom fell out of the banking industry.
The collapse of many of the major banking institutions, as well as much smaller ones, was perilously close to the start of the Great Depression in 1929. That fate was narrowly avoided by government intervention, but one of the factors responsible for the crisis was predatory lending. In short, banks were targeting poor Americans for home and car loans and betting on the fact that these loans would not be paid back. The rich got richer and the poor got poorer, until the model of doing business caught up with everyone. Suddenly, even the wealthiest banks in America were as bankrupt as the people who went to them for help.
After such a catastrophic event, the United States government started to pay more attention to lending practices across the country. Credit card companies were given new sets of rules preventing them from abruptly raising interest rates, and predatory lending was swiftly put to an end. However, services such as payday loan companies and "bad credit" credit cards have still been considered legal and not committing any infractions in charging rates of interest up to 400%. Unethical, perhaps, but the government decided people understood the terms when agreeing to these loans. Meanwhile, these business practices hurt those lenders that offer reasonable terms on lending to middle and lower-class Americans. It is the ones taking advantage that end up being advertised the most, that work to be the most successful, that promise "the money you need now" while minimizing the strings attached.
Putting An End To Exploitation
In 2014, all of that changed when President Obama decided to look into these forms of financing, and declared many of them to be predatory lending practices. While not illegal, measures are being put into place to put a cap on the maximum rate of interest and penalties handed out by those offering bad credit loans. As a result, the institutions in business to take every last dime from those struggling to make ends meet, or those who offer loans and wait for borrowers to default and get money back from the government are being forced to close up shop.
While the government is working to protect people who need to borrow money in the form of a payday loan, credit card, or traditional loan, it is still each individual's responsibility to avoid falling into traps that will make a bad financial situation worse. For those in need of a payday loan or bad credit financing, it's important to remember that reputable lenders do exist and it is not wise to choose the most popular option without comparison shopping. However, even the most honest of lenders will charge a higher rate of interest to those considered a poor credit risk.
Strong Financial Decisions Begin With Information
A good start for every American is to know what's on one's credit report, and to actively monitor the situation. Establishing good credit is not a privilege reserved for the rich, but it does require responsible financial behavior and diligence when it comes to keeping an eye out when lines of credit are required. Borrowing money is certainly not a bad thing, not even if a payday loan or bad credit financing is needed. Having no credit presents as badly on the credit report as having bad credit, so choosing the right lenders and only borrowing what you can afford is essential to building a better credit profile. Of course, a better credit profile leads to lower rates of interest and can end up saving a borrower thousands of dollars as a consequence.
For those who aren't sure where their credit stands, it is important to take a look at the nitty-gritty details, especially if poor credit is leading to a payday loan or credit card company. There are services available online that give you a free credit score. However, this is in actuality not always what a lender sees when doing a credit check.
There are three bureaus that run credit reports on every American: Equifax, Transunion, and Experian. The problem is, not every lender reports to all three bureaus, so a score may be substantially higher or lower on one report than another. It is best to invest in a service that shows the details of each bureau's report, including the all-important FICO score, a number that defines your credit-worthiness in three digits. These services also provide monthly updates, helping the average person to keep track of financial decisions and dispute anything that may be an error.
Can Payday Loans Still Be A Good Thing?
In the meantime, if one does need a payday loan, it is important to use it as such and pay it off as quickly as possible. These lending sources are not bad when used properly; in fact, they are designed to benefit working-class Americans who have been put in bad situations due to an unexpected emergency. Unfortunately, studies have shown that over 70% of those who need payday loans are using them to pay for food, shelter, and other basic needs. This becomes a cycle that feeds itself and only ends up in extraordinary debt. While the government is cracking down and putting laws in place to govern those who offer payday loans and bad credit financing and keep the poor from being exploited, it is also the borrower's responsibility to make intelligent choices that don't end up keeping the wheel of debt and borrowing money turning.