Payday installment loans are short-term loans provided to help cash-strapped individuals. These loans are also known as emergency loans or instant cash loans that can provide quick cash with fast loan approval.
However, since payday installment loans are short-term loans, they must be paid back on the next payday, usually after two weeks. The problem with most borrowers of these loans is that they aren’t be able to fully pay back the loan when it is due, thus resulting in a default. These defaults often lead to borrowers paying for penalties and late fees.
Will Dobbie and Paige Marta Skiba of the RAND Corporation Economics Seminar in their presentation, analyzed the databases of two payday installment lenders, randomly selected, and found that the average delinquency rate of borrowers on their first loan was 10% for lender A and 23% for lender B, on the second loan. It’s common for borrowers to take out multiple loans; however, and when this happens the chances that they will default rises. The average default rate on all loans was 39% for lender A and 61% for lender B.
Many borrowers increase their chances of repaying by taking out smaller loans. Dobbie and Skiba reported that similar borrowers who $100 had a the rate of default between 7 and 8.4 percent. The researchers hypothesize that because of the high interest rates and unstable financial situation of borrowers, the chances of defaulting increases with loan size.
Payday installment loans are typically small in size, but if a borrower defaults, he can end up paying more in interest and penalties than the principal amount. To avoid this scenario, borrowers can take several steps to make sure they do not default on their payday installment loan(s).
1. Provide your payday installment loan lender with a bank account number. Many lenders require borrowers to give checking or savings account numbers so the lender can deposit money into the account and then, when the loan comes due, withdraw from it. Even if the lender does not require this, it is a good idea to provide one as a backup plan in case you cannot repay the loan.
2. Get overdraft protection for your checking account. After giving the payday lender a bank account number make sure the account is secured with overdraft protection. This means that if in case there is not enough money in the account to cover a charge, money from another account is automatically made available to cover the difference.
3. Have a backup plan. Although you may have a primary means by which you intend to pay off your payday installment loan, having a backup plan is essential in case something goes wrong. Your back up plan may include a short-term loan from friends or family or even taking out a second payday installment loan from another lender.
4. If you have other sources of income, pay as much as you can before the due date comes. Most payday installment loan companies allow borrowers to pay back the loan before the due date. In order to make sure that nothing goes wrong, pay back the loan as early as possible. If possible, pay in person rather than by mail to be certain the payment is received by the lender.
5. Contest any assessed penalties. If a payday installment loan company attempts to assess fees or penalties that you did not agree to, this is violating the law and the lender is obligated to return the money to you. You may also consult an attorney about taking legal action against the company.
You can avoid penalties from increasing when in default with your payday installment loan payments by making sure that before applying for a loan, you assess your finances carefully to see if you can afford the payments. This is important to avoid problems arising in the future.