Payday Loans: Beware of These Dangerous Loans. You might think about payday loans as a source of short-term finance if you need money right away. Payday loans are more readily available than a personal loan or even a cash advance on a credit card because they are simple to apply for and don’t include any kind of credit check. Are they a good idea, though?
How Payday Loans Work
In essence, a payday loan is an advance on your next salary. You present the payday lender with your pay stub as evidence of income and specify the loan amount. They grant you a loan for that sum, which you are required to repay along with the payday lender’s fee when you get paid.
The length of the repayment period depends on whether you get paid weekly, bimonthly, or monthly. In addition to proof of employment and a pay stub, you’ll also need a bank statement or your bank account information to apply. Payday loans are typically deposited right into your bank account once you’re approved, so you get instant access to the money.
You might need to write a post-dated check for the loan amount plus any costs, depending on how the payday lender handles loans. In this scenario, you might be required to sign a contract stipulating that the lender will hold the check until the predetermined repayment date.
You are responsible for repaying the loan on the due date, together with any costs the payday lender assesses. If you are unable to pay back the loan in full, you may be able to ask the payday lender to extend it or roll it into a new loan, but this normally entails additional fees.
The possible repercussions of failing on a payday loan are comparable to those of defaulting on a credit card or another unsecured obligation. Failure to repay can result in the lender threatening criminal prosecution or check fraud. Not to mention, you could suffer credit score damage if the debt is sent to a collection agency.
The Downside of Easy Money: Why Payday Loans Are Dangerous
Payday loans are practical, but that practicality has a price. The variety of finance costs, which can be anywhere from 15% to 30% of the loan amount, can quickly push the effective annual percentage rate (APR) into the triple digits.
Even if you only hold the loan for a few weeks, a payday loan is likely to have higher interest rates than a personal loan or even a cash advance on your credit card. Because they are frequently preferred by borrowers who do not have access to cash or other readily available financing choices, payday loans are frequently troublesome for the people who utilize them.
When a borrower slips into one of the main traps associated with payday loans, they may find a cycle of repeatedly extending their loan. They find themselves unable to repay the loan on payday, so they extend the loan for another pay period. They continue spending borrowed money and in the meantime, the fees continue piling up. It’s a vicious cycle and it can continue indefinitely since there is no limit on how many times a person can get this type of loan.
Avoid the Loan Need With a Budget
Making a budget for paying your bills is the best thing you can do to keep yourself from needing payday loans. Reduce as much wasteful spending as you can and concentrate on building up an emergency savings account that you can access when money is tight. Even spare coins lying around the house can be saved and increase over time with interest.
However, saving money takes time, and if an unforeseen emergency arises, there are alternatives to payday loans. For instance, you might be able to avoid the intermediary by requesting a pay advance from your company. Your company might provide this in an emergency without charging the associated fees with payday loans. But, it’s not something you want to make a habit of doing.
Payday Loan Alternatives
Even if you have terrible credit, you should be aware that you have other lending options, referred to as Payday Alternative Loans (PALs). These alternate financing options can be found online and in your neighborhood. Your last option should be a payday loan.
A loan from a pawn shop is another option. You can use valuable possessions, such as jewelry, tools, electronics, or other valuables, as security for a quick pawn shop loan. You receive money in exchange for your item, and you still have a certain amount of time to return, repay the loan, and receive your thing back. The drawback is that the pawnshop will keep your collateral if you default on the loan. However, this is frequently a better option than obtaining an unsecured payday loan and being hit with exorbitant fees that lead to a dangerous debt spiral.
Credit card cash advances are also a possible substitute for payday loans, albeit they are not ideal. Although it’s ideal to have an emergency fund set up to handle financial emergencies, a credit card will do in a pinch. Additionally, a credit card cash advance loan has an APR of 25–29% less than a payday loan’s 400% APR.
Another option is to borrow money from friends or family to get through a tough moment. Most people have friends or family members who will lend them the cash they require to cover unforeseen costs or crises. These loans typically carry little or no interest, and arrangements to repay the loan over time in installments can occasionally be established.
Just be mindful about being clear with the person you’re borrowing from about how and when the loan will be repaid. Borrowing money from friends or family members can ruin relationships if not handled appropriately so make sure to set realistic expectations at the start.
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