What Are Payday Loans? Do you know those “quick cash” places you hear about? They are payday lenders and they are not your friends. Payday loans depend on desperate people who have few other options to keep their doors open.
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How they work
Let’s say your car breaks down on the side of the road or your electricity has been cut off due to non-payment. You have no money in the bank and your credit rating is low. A payday lender might sound like a good idea. After all, they don’t require a credit check and promise to get you the cash you need fast.
According to a personal loan study by The Ascent, you could end up paying 400% or more in interest because of the way payday loans are designed. (Interest rates in 2019 ranged from 154% to 677%.) The average interest rate on a credit card is 16.16% according to the CreditCards.com weekly credit card rate report. And, at the time of this writing, the Annual Percentage Rate (or APR) on the best personal loans for bad credit tops out at around 35.99%. Considering these statistics, charging over 400% is the act of a predatory lender.
Part of the problem is this: In 2019, 33 states still allowed payday loans. (Some other states have ended these predatory lending practices.) None of the 33 states that still allow payday lenders to operate limits the amount of interest charged.
How they keep you hooked
Whether you are visiting the physical location of a payday lender or taking out a payday loan online, lenders make it easy for you. All they need is some ID, proof of your gross monthly income, and a post-dated check. You tell them how much you want to borrow and they ask you to write a check for the amount you borrowed, plus fees. They make you post-date the check for two weeks.
If you can’t repay the loan in full by the due date (and the average borrower can’t), you owe them the original amount you borrowed, any fees they added to the loan, and the interest accrued in these two weeks. Suppose you initially took out a small loan of $ 500. Two weeks later, you could owe $ 600 or more.
Hey, it’s okay – at least according to the payday lender. They will give you another loan to repay the first loan. Now you will need to borrow the $ 600 (or more) you owe on the original loan and another round of loan fees. Between principal, fees, and finance charges, you’ll likely end up owing $ 700 or more two weeks later.
Payday lenders are not naive. They know you have other financial obligations. It is in their best interest to continue borrowing to repay past borrowings. When you finally pay off all of the debt, they end up with more money due to excessive fees and interest. Even small dollar loans can be very expensive.
We can’t tell you about payday loans without suggesting other ways to find money when you are in trouble.
Consider a cash advance
If you have a credit card, a cash advance loan may be the solution. Cash advances generally carry a higher interest rate than regular credit card purchases, so we don’t normally suggest that you withdraw one. However, when the choice is between a cash advance with an APR of 30% or a payday loan with an APR of 400% or more, a cash advance clearly wins. Most cash advances come with a fee and start earning interest immediately, so try to pay them off as quickly as possible.
Turn to your friends and family
If you only need enough to keep you going until your next payday, the help of a friend or family member might be the way to go. Before borrowing, make sure you can repay the loan as promised. There are few things worse than leaving someone else embarrassed because you couldn’t live up to your end of the deal.
Let’s say you paid to fix your car but now you have no money to feed your family. A number of organizations offer support services. Help is available with just about everything from groceries to utility bills to transportation. Need Help Paying Bills has a long list of organizations, who they help, and how to contact them.
Apply for a bad credit loan
As mentioned, borrowers with bad credit may still be eligible for a bad credit personal loan. Your interest rate is likely to be high, but it’s better than paying 400% interest.
An installment loan like this offers several advantages:
- You will know exactly how much your monthly payments will be and when the loan will be repaid in full.
- You can ‘set it and forget it’ by scheduling automatic monthly payments from your bank account.
- If you want to pay off the loan quickly, you can choose a short term loan.
- Personal loans are available from local banks, credit unions, and online lenders.
- You can avoid a predatory high interest rate.
- As long as you stick to the repayment plan, your credit score is likely to increase.
In short, trying one of these options instead of falling victim to predatory payday loans is good for your bottom line.