Why Payday Loan Lenders Don't Work With Debt Relief Companies
This question was presented to us today via Twitter from @steverhode and he wanted to know why payday loan lenders don't work with debt relief companies or debt management companies. This is a good question and one that probably gets asked quite a bit so we thought we would take the lead on this topic and try to answer it the best we can.
This can be explained quite simply that payday loans do no have installment payments, revolving plans, or long term credit, and therefore don't fall under the same guidelines as long term loans. For example, a person has a credit card debt of $1000 and they are making a monthly payment of around $50. This type of credit will take almost 2 years to pay back at a cost of $1150, given a 15% interest, which means that the credit card company will make $150 over the life of the loan, and that is if the person doesn't use any more credit over the two years, which in most cases doesn't happen. A debt relief company will step in and provide the person with a new loan, secured of course, and setup a new payment plan that they can pay back with greater ease. However, a payday loan is already secured with a blank check, and there are no installment payments with usually only one payment to make. This means that the payday loan lender isn't expecting any long term payments and is only making a few dollars for the one payment that they set up and therefore cannot afford to lose any of it. Long-term loans have lots of payments and opportunities for the lender to make money, as well as room to lose some, but short term loan lenders do not have the same luxury.
Example would be $100 taken from a payday loan store and they make $15 only, that's it. The same $100 revolving on a credit card can be as much as $15 a year also, making the minimum payment, but it's on going as long as the person has a balance. This means the company can profit from the same balance for years, which makes the credit card companies more inclined to work with the debt relief because they would be happy to get something for the debt, versus getting nothing, whereas the payday loan lenders already have the money technically secured via a check, and they don't have the ability to do long term payments.
In addition, given the fact that payday loans are not secured on credit, the person that is borrowing from a payday loan place will have a harder time to get a debt relief loan because deft relief is usually secured with some sort of credit as well as some sort of traditional goods. However, if a person does have good credit, and can secure a debt relief loan, then they should be in a good position to borrow money to pay back any payday loans and thus negate the need to add them to the debt relief
Lastly, payday loans are typically short term based loans, with usually only a small amount borrowed. Many states have capped the amount that can be borrowed, and typically this amount will be less than $500 dollars. Debt relief solutions basically try to negotiate the amount that the borrower had taken and get it reduced, but short term loan lenders won't be able to reduce the amount that they offered since they are only making a one time fee for the money they offered. After negotiating a lower balance, the debt relief companies will turn around and still charge the same loan amount to the borrower but at a lower interest, or spread the payments over a longer period to reduce the amount paid each month. This means that debt relief companies are basically making money on negotiating a lower debt, and then charging interest on the money they loan, and short term loan lender, or payday loan lenders, don't have the ability to reduce their loan amounts because they are made as one time payments and not revolving plans that they make money on each month.