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Myths on Payday Loans
What are you going to do if someone knocks on your door and hands you a couple of unexpected bills to pay? What if you have already used all of your money to pay for your monthly expenses? In reality, this incident happens a lot. People may have planned their budget well, but there are some unexpected expenses that usually catch them off guard. When this happens, people result to making payday loans.
In the UK, the most popular type of loan is referred to as payday loans. It is an easy and short-term loan used to fund unexpected expenses. People usually have a bad perception with payday loans. But there is absolutely nothing wrong with making payday loans. No matter how hard you try to secure yourself financially, things like this may still happen from time to time. Here are some of the common myths with regard to payday loans.
First myth – payday loans are availed only by poor people with bad credit. This is not entirely true. Although most people who avail payday loans belong to the lower echelons of society, payday loans are also offered to average and rich people. In fact, there are a number of average to rich citizens who are applying for payday loans from time to time. This is used to cover up for their miscalculations during budget planning and to pay for fees that were not anticipated. It is also a myth that payday loans are availed by people with poor credit. Often times, people would have reached their credit limits at the end of the month. But it is also at the end of the month where unexpected expenses arise. Thus, these people result to availing payday loans.
Second myth – payday loans have outrageously high interest rates. The myth regarding inflated interest rates is very much false! Actually, UK payday loans have slightly higher interest rates than regular types of loan. It should be noted, however, that payday loans are intended to be short-term loans. Payday loans are to be paid as soon as possible. Thus, the accumulated interest is not really very high. On the other hand, regular loans are intended to be long term. By the time when people are ready to pay their loan, the accumulated interest is already very high.
Third and last myth – payday loans are peoples last resort. This third myth tells us that only people who have run out of options choose to avail payday loans. This is a very big misconception. Although it is those types of people who usually avail payday loans, this type of loan does not only cater to them. It would actually save you a lot of time, effort, and resources if you would avail payday loans the moment you need them and not wait until you have exhausted all of your resources and options before doing so. Not everyone who applies for payday loans is desperate or free of any other option. In actuality, many people simply want to have more available money so that they can be ready for emergencies.
Loan Modifications: More Harm than Good?
In 2009, millions of United States homeowners learned that modifying their existing home loans served only to expedite foreclosure rather than prevent it. A U.S. Treasury report released in early December of 2009 revealed that only 4% of applicants under the federal governments Home Affordable Modification Program (HAMP) have been able to successfully modify their loans on a permanent basis. Further, of those 4% that were able to modify their loans, an amazing 40% went into default within the following 6 months. The unfortunately reality exposed by this report is that while many homeowners allowed their homes to go into default to initiate a time consuming modification process, they effectively disregarded their most viable option for debt relief: a short-sale.
As many homeowners across the country became enticed with the prospect of reducing their monthly payments and loan balances via the HAMP loan modification process touted by government officials, borrowers began contacting their lenders in droves. Banks often instructed borrowers that they must discontinue making their mortgage payments in order to qualify for a modification. Homeowners also found that allowing their home to go into default provided them increased leverage to expedite modification negotiations with their lenders. It is at this point in the modification process that an agonizingly slow train wreck was initiated as seemingly endless unreturned phone calls, requests for more documentation, and transfers to various bank representatives were experienced across the country. All the while the normal 6 to 8 month window between default and the foreclosure sale was closing steadily.
The vast majority of homeowners ultimately learned that the bank would not reduce their principal loan balances and that their monthly mortgage payments would only be reduced nominally or temporarily. Often times this realization didnt come until after the notice of trustees sale was received by the homeowners when the debt relief window was only still barely open a crack. The unsubstantiated hope that the HAMP modification program created in millions of financially distraught borrowers served only to prevent them from taking advantage of what has become the most reliable and effective way to avoid foreclosure.
The short-sale process initially started out on rocky ground before banks had time to set up adequate systems and procedures to accommodate large numbers of applicants. However, the year 2009 saw the short-sale process grow increasingly more expedient as the average bank processing period for a completed application rapidly dropped from 4 to 6 months down to 2 to 3 months by years end. Further, most borrowers are no longer required to default on their monthly payments prior to attempting to sell their homes for amounts less than what is owed. Apparently realizing that short-sales represent the most effective method to stave off mass foreclosures, the federal government has also acted to eliminate income tax penalties for short-sales until 2012. Not surprisingly, all of these events have led to an increasingly large amount of successful short sales in 2010.
Many will contend that loan modifications are more appealing since they permit borrowers to remain in their homes while short-sales only serve to sell their homes to others. However, it is essential to remember the large percentage of borrowers that are foreclosed upon even after they have successfully modified their loans. Not to mention the incredibly small number of applicants who are actually able to modify their loans to agreeable terms. Furthermore, is it unreasonable to assume that financially troubled borrowers would be better served selling their properties short and moving into more reasonable accommodations until better suited to take on increased debt?
Short-sales represent the conservative option for borrowers looking to get out of increasing debt and into a position where they can begin saving for the future again. Alternatively, loan modifications have become a long-shot gamble on the part of the borrower with only a limited amount of time between default and foreclosure. If the goal is to reduce debt and monthly payments while avoiding foreclosure, there is no doubt that a short-sale is the most reliable and effective course of action.