Payday loans can seem like a lifeline when you need quick cash, but the high costs and short repayment terms can trap you in a cycle of debt.
While there is no proper definition of a payday loan, it is usually a short term loan for a modest sum, usually $ 500 or less, payable with the charges on your next check. payroll.
Although payday loans are advertised to narrow the gap between paychecks or help with unforeseen needs, the Consumer Financial Protection Bureau warns that they can become “debt traps.”
Because many borrowers cannot afford the loan plus the fees, they are forced to pay even additional fees to avoid paying the debt. So, they keep “renewing” or renewing their debt until they end up paying more in fees than they originally borrowed.
How do payday loans work?
Payday loans are known by various names, including cash advance loans, deferred deposit loans, check advance loans, and online payday loans, but they all work the same.
To get a payday loan, you may need to write an uncashed check for the full amount, including fees, to the lender. You can also allow the lender to automatically debit your checking account. The lender will usually give you money after that.
The loan is usually due on your next payday, which is usually two to four weeks away. The lender can redeem your check or digitally deduct your bank account if you don’t pay off the loan plus the finance charge on the due date.
Many states that allow this form of loan place a limit on the amount of money borrowed and the costs that go with it. Depending on the state, businesses may be allowed to charge between $ 10 and $ 30 for every $ 100 loaned.
Why Do People Take Payday Loans?
Payday loans are a perfect choice for people with bad credit. This is because the borrower does not have to worry about their credit being insufficient or nonexistent when applying for a loan.
Another potential audience is people with little or no savings. This highlights the huge potential of the payday loan market and explains why they are so prevalent. Payday lenders have a configured market because credit problems and lack of funds usually go hand in hand.
While many people can get by with their monthly expenses, an emergency requires the use of the money just once.
What Are the Dangers of Payday Loans?
While payday loans can provide much needed cash, you should be aware of the risks.
- High annual percentage rates
Consider a $ 500 loan over two weeks with $ 15 in fees for every $ 100 borrowed, or an annual percentage rate of nearly 400%, according to the CFPB.
- Short term
A payday loan (https://www.paydaylv.com) generally must be repaid within 2 to 4 weeks of the initial loan. Since policies vary from state to state, check your state’s laws.
- Additional charges
If you do not pay off the loan on time, you may be charged additional fees on top of the original loan fees. Plus, if you renew your loan or borrow again, these fees start to add up. According to the Consumer Financial Protection Bureau, about a quarter of original payday loans are re-borrowed nine or more times.
Additional charges may include the following:
- If you do not have enough money in the account when creditors attempt to cash your check or digitally withdraw from your account, you will be charged insufficient funds fees.
- If you do not repay on time, you will be charged late fees or repayment fees from the lender.
- The rolling charge is on top of the original loan and the first cost to extend the closing date of your loan.
- Will not create credit
People with bad credit may not be able to get loans on reasonable terms. On the other hand, payday lenders rarely register your credit report with the credit bureaus, so the loan will not help you develop your credit.
Alternatives to payday loans
- Alternative payday loans
You may be able to get low interest private loans if you belong to or can join a financial institution. For example, members of federal banking institutions can obtain replacement payday loans for amounts ranging from $ 200 to $ 1,000. These typically have six months or less, an application fee of $ 20, and APRs of no more than 28%.
- Paycheque advance
In some places, your employer is allowed to advance your payment without charging you a fee. However, it may depend on your company’s decision, so talk to your boss or a human resources representative about your alternatives.
You can also use smartphone apps, which will send you money between paychecks if you meet specific criteria.
- Debt settlement
A debt settlement can impact your credit while helping you settle your debt and get a fresh start.
Personal loans can have high interest rates, but if you are in need of a loan and are not eligible for cheaper rates, it is essential to shop around. You might qualify for a bit higher rate and longer terms than the conventional payday lender offers, but you won’t know unless you look around.
Look for a lender who responds to major credit bureaus when applying for a loan. A good reputation for making loan payments on time will help you build credit and ultimately qualify for lower loan rates.
- Credit counseling
In the long run, you can work on fixing the underlying financial issues that keep you coming back to the kiosks for payday loans. Consider credit counseling, which can help you budget and open a deposit account.
It is a wise practice to research and evaluate funding opportunities and think about long-term financial improvements that might help. You can start by establishing a budget and a debt repayment strategy.
Payday loans are acceptable, but they should be accepted with caution and repaid promptly due to the high interest rates they charge.