Consumer Tip: Beware of “Zero Interest” Payday Loans

A new UK-based site, InstantLoansDirect.com, is trying to attract new borrowers by offering so-called 0% interest payday loans. They offer short term loans without interest, but there’s a catch. There is no interest for the first eight days, but after that initial period, there’s a daily fee based on the amount of the loan. This means that the claim that the loans are “interest free” is somewhat misleading. Obviously, the company wouldn’t make any money if they were just giving it out—in fact, they would lose money, as there would be no profit to be gained. The company is set to make money off of borrowers who won’t be able to pay back the loan on time, and will then be met with staggering interest rates. Borrowers who can’t pay the loan back at first will usually take out another loan to pay off the previous one, and this can create a never-ending loop of debt.

Payday loans are nothing new, and they’ve often been viewed as a type of “predatory lending.” Typically, businesses that offer payday loans are situated in low-income neighborhoods where people are more likely to find themselves desperate for cash. Payday loans are known for their notoriously high interest rates, which can sometimes climb up to 1,000% APR. The new zero-interest payday loans are likely being presented to borrowers as an alternative to the traditional high-interest loans, but the fact is that they do come with interest, just not in the short term.

Many experts predicted that the recession and the sub-prime mortgage crisis would lead to a decrease in predatory lending. But in fact, it seems that the opposite has occurred. Because of the financial difficulties experienced by many American citizens since the Recession, predatory lending has not only increased in intensity, but has adopted more deceptive marketing techniques in order to persuade consumers to take out loans.

But are all short term loans considered “predatory”? Or, are some short term loans reasonable enough in their terms and rates to prove an effective solution for consumers struggling with financial difficulties and cash shortages?

Payday loans are only one of the short term loans available, and consumers should consider the variety of other options at their disposal before diving into a high-interest payday loan. For instance, auto title loans have become popular with many consumers due to the distinct advantages they offer over many other short term loans. Car title loans offer lower interest rates than “cash advance” loans. Title loans also come with longer repayment periods than other short term loans, allowing borrowers up to three years to pay back what they owe. In addition, borrowers may consider other types of secured loans that offer money in exchange for some of the borrower’s property as collateral.

When considering short term loan options, remember to keep these tips in mind:
• Ask about the interest for the full term of the loan.
• Know your collateral. What do you stand to lose if you default?
• How long do you have to pay back the loan?

It remains to be seen whether “no interest” payday loans will become popular among borrowers who are looking for short-term cash. One thing is certain: it’s always best to understand what you’re agreeing to when you use any financial service. If something sounds too good to be true, it probably is.