The main features of payday loans
The payday loan (also called fiduciary loan ) is a non-finalized loan, that is not specifically intended for the purchase of a good or service. It therefore responds to a generic need for liquidity on the part of the applicant. This is the most flexible loan because it is fast to deliver and can be used for any purpose. Since the purpose of the loan is not well defined this type of loan is considered to be of maximum risk on the part of the banking system and is therefore paid very cautiously and at rather high rates.
Additional guarantees for payday loans
Often the acceptance of the request for payday loan is subordinated to the co-obligation of a family member willing to countersign the loan contract together with the principal. The ideal co-owner is the spouse but brothers and parents are also fine.
Most of these are payday loans with a fixed monthly installment and with a French depreciation method in which the installment is constant and consists of a share of repayment of capital and a portion of interest . The first installments will contain little capital and a lot of interest and the last installments the opposite: lots of capital and few interests.
Note that the common opinion holds that “in the beginning only interest is paid”.
This is not exact because the interest contained in the installment is always calculated on the residual capital at the time of payment . It goes without saying that in the beginning, since the capital is almost intact, the interest will be high and the part of the capital of the installment will be lower. With the passing of the installments and with the lowering of the residual capital, the ratio is reversed .
The payday loan contract
In consumer credit agreements we can read some common elements :
- The nominal interest rate TAN representing the percentage rate of “pure” interest. Sometimes this rate is cleverly advertised because it is the lowest of the contract but as we will see shortly it is not at all the representative of the real cost of the loan ;
- The preliminary cost : this is a figure that is deducted from the net loan during the disbursement phase and represents the expense incurred by the Intermediary to instruct the case;
- Distribution charges : these are the charges charged by a possible Credit Ombudsman or by a Financial Agent who has followed the case on your behalf;
- Brokerage commissions : these are those charged by the Financial Intermediary , that is, the entity that interposes itself between the Bank itself and the Credit Agent;
- The policy premium : do not be fooled by the name, it is not a prize at all but on the contrary an expense that is charged to ensure the loan against the risk of premature employment and against the risk of losing the job. In the latter case it will serve to cover the installments falling due during a possible period of unemployment. It should be noted that these policies by law cannot be considered obligatory (with the exception of the assignment of the fifth, see below) but in the reality now very difficult that a loan contract does not provide them
- The interest rate APR (or ISC). It is the abbreviation of Annual Global Effective Rate. The name says it all: it is the rate that really represents the cost of the loan. In addition to the TAN, it also includes all ancillary costs such as the preliminary investigation and insurance
NB: when evaluating whether to request the loan or not do not be misled by generic indications of the type “interest-free loan” but check that it is effectively controlling the APR. If the TAN interest rate is zero but then oblige you to take out a policy and add the preliminary investigation fee then the APR is different from zero and may even be relevant.
- The forfeiture of the benefit of the term . Among the contractual clauses we always read that a possible outstanding can determine the forfeiture of the benefit of the term. What does it mean? The benefit of the term is the possibility that the Financial Company gives the client to repay the loan in a certain period of time (eg in 36 or in 48 months). During this period the customer undertakes to pay interest and to meet the payment deadlines. If this does not happen, the Bank can declare the benefit of the term lapsed and therefore demand the immediate repayment of the entire sum still due.
Early repayment of the payday loan
The distinction between the TAN rate and the APR rate is particularly important when you decide to pay off a payday loan early.
The law limits the early repayment penalty to a maximum of 1% of the capital repaid. It is therefore a fairly modest expense (to give you an idea, on the $ 10,000 of capital repaid the penalty would be $ 100) but be careful because there could be some relevant hidden costs.
To avoid unpleasant surprises, check that the contract provides for the “pro rata temporis” reimbursement of ancillary loan costs, that is, in proportion to the number of unexpired installments. The cost of the preliminary investigation is always excluded from the reimbursement (and this is correct because it is a question of out-of-pocket expenses sustained by the Bank) but other expenses such as distribution charges or brokerage fees could also be excluded (or recognized as a minimum percentage).
From 1 December 2010 the single initial premium of the pre-pay policy must be reimbursed to the customer in the event of early termination for the “not taken” part.