The trend lately amongst tribal lenders is to distance themselves from their own business format, which for most companies is the payday loan. The majority of all tribal lenders, at least 80% of the total, have one loan product. That one product is the payday loan, where a customer takes out a loan anywhere from 10 to 20 days before their next pay date (from their employer) and they face two choices on that next payday.
The customer can...
1) Repay the loan in full, which means paying the finance charge (usually 30% of the amount borrowed) along with the principal amount that was borrowed, on their payday. If this is the option the customer takes the full loan is deducted from their checking account around 2am so by the time the customer wakes up the loan has long since been repaid from the direct deposit the customer received from their employer.
2) Repay only the finance charge (the interest charged) from the loan. For example, if a customer borrowed $500 in a payday loan and they signed for a 30% bi-weekly interest rate, then that customer would have to pay $150 ($500 x 30% = $150) on their next pay date. The difficulty that arises from this decision is that none of the repayment went toward the principal amount that was borrowed. In other words the customer made no progress (not even $1) toward paying off their loan, but instead paid the interest charge for that time only.
When a customer takes this option they are rolling over their loan. Payday lenders like customers to take this option, because they will often find themselves in a pattern of just paying the interest on the loan. During this time frame they will not make any progress towards paying off the principal amount of the loan.
Now the question is when does this situation actually take place in reality? Let's pick on one of the newer tribal lenders and that company is called Dakota Lending. The company refers to itself, and talks at length on their site about "tribal installment loans" however when you look at the financial service they are offering it is nothing more than a payday loan.
Let's look at the verbiage used on the Dakota Lending website versus what the company is offering in real life. Below is a direct quote from the Dakota Lending site, and this message is located very prominently so all potential customers can read it....
"Dakota Lending offers you an Installment Loan that works for you."
And then the company proceeds to say....
"Get your Dakota Installment Loan, manage your account and set payments online by logging into your personal account."
However, the company then goes on to explain that their loans are due on your next pay date. How does this work if it is an installment loan? Let's look at their exact (quoted) language below....
"Installment Loans are usually due when you receive your next paycheck via direct deposit."
Are they trying to say that a portion is due on your next payday? If they meant to say that then they should have been more careful because the current reading of their FAQ is confusing. The problem boils down to the fact that the company is either misleading or they are inaccurate in their representation of the loan.
Either a portion of the loan is due on your next payday, or (if the entire repayment of the loan is due on the next pay date) the loan is actually structured as a payday loan and not an installment loan. There is a big difference, if you have never borrowed from unsecured (high interest) online lenders then take it from those of us who have gone down that road.
Getting a payday loan means that you (the borrower) need to be ready to come up with the full amount of the loan plus the interest (finance charge) which is usually 30% of the original loan amount. So you would have to have 130% of what you borrowed available to repay approximately 14 to 16 days after you first borrowed the funds.
On the other hand, an installment loan would require that you have somewhere around 8% t0 12% of the original amount you borrowed on the next pay date after your loan. You only need this slight amount (about 12% compared to 130% firm for a payday loan) since you are just paying the first installment (thus the name of the loan product) and you will have several more repayments over the next few months. Every other Friday you will repay a block of money that is roughly 12% of the loan amount.
The payday loan and the installment loan are two very different financial creatures. Dakota Lending needs to be very clear about which type of loan they provide because there is very little similarity between the two types of debt. If they truly offer an installment loan (as they indicate) then they shouldn't be using verbiage like 'the loan is due to be repaid on your next payday' or any such discussion. An installment loan would not be due for quite some time after the loan was first taken out.
Dakota Lending may want to review their website and try to create a little more clarity.
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