Payday loans are short-term, high-interest loans offered by small companies.
Are they a good deal? Usually not.
They are intended to cover your financial needs until you reach your next payday — that’s when you’re expected to repay the full amount, or you’ll be hit with additional fees and finance charges.
Unfortunately, if you’re trying hard just to make ends meet, you may not take the time to understand the risks and dangers involved.
Here are 5 reasons to avoid a payday loan, plus 7 better ways to get cash fast:
#1 – The interest is way too high.
First, let’s look at the cost of the loan — the finance charge, which includes interest as well as any other fees paid to the lender.
Payday loans typically have a finance charge of 10-30%.
That’s bad enough, but where it gets really crazy is when you look at the annual percentage rate (APR).
Payday loan companies frequently have an APR of 400% to 1000%!
By comparison, APRs on personal loans range from 6-9% and APRs on credit cards typically range from 12-30%.
Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about 2 weeks. Loans typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 to borrow $100. For 2-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Source
#2 – Defaulting affects your credit record.
As far as your credit record is concerned, a payday loan is treated much like a normal loan.
This means that your credit rating will suffer similar consequences if you default on owing a few dollars on a daily loan — just as it would from defaulting on a bank loan of several thousand dollars.
That’s a very big risk to take.
Payday loan companies use very aggressive collection methods for customers who default on loan payments. These companies begin making incessant calls to you at home, at work or on your cell phone. The loan company also calls friends and relatives in an attempt to contact you. A payday loan lender can sue you in civil court for the amount of the loan, the returned check fee and court costs. Source
#3 – Some payday loan companies abuse the process.
Some payday loan companies have little regard for your well-being and they’ll use whatever means they can to make money from the lending process.
The payday loans niche is a magnet for loan sharks and other unscrupulous individuals looking for a quick profit. And they don’t care what their success costs you.
The small print in these companies’ contracts can contain very nasty clauses that allow them to send debt collectors to your door, harass you extensively (though not illegally) and recoup their losses by taking your possessions.
Many states have laws that require payday lenders to be licensed in order to offer loans. However, many unscrupulous lenders evade this requirement. These lenders operate exclusively online and are usually located overseas, although that may not be apparent from their websites. Some may even have an address that appears to be a U.S. address, but is actually a mail drop at a retail store that rents mail boxes. Source
#4 – Borrowing with a payday loan can start a very vicious circle.
Payday loans are intended for people with a regular income who just need a bit of cash to tide them over for a few days.
However, a significant part of the market is made up of people who are struggling with debt. The ease of obtaining payday loans tempts those who already have very little money to take on an even greater burden to answer a short-term need.
Desperation is a powerful force, but if you’re already in debt and struggling to make ends meet, then you should avoid adding another extremely expensive debt to the list.
A typical payday loan is due in full on the date the borrower receives his or her next paycheck or benefit payment. Source
#5 – There are often better alternatives.
If you’re looking at payday loans for a short-term solution, you may not realize that there are other alternatives:
- You could ask your employer for an advance on your wages.
- You can ask your bank for an overdraft line of credit — the interest rate will be lower than a payday loan.
- You can see if the welfare office has any crisis solutions available.
- You could ask friends, family or neighbors if they could lend you a little cash — just until your next payday.
- You can sell items online (eBay, Craigslist), at home (yard sale), or at pawn shops.
- You can call your credit card company and ask them to increase your credit limit.
- You could even get a cash advance from one of your credit cards — the rate is high (20-30%), but not nearly as high as with payday loans.
Payday loans can be a real godsend if you need a small amount of cash for a sudden emergency and you’re able to pay off the loan in full when you get your next paycheck.
But if the amount you need is that small, then there are probably easier (and less expensive) ways to get a cash advance.
As with all financial decisions, you need to look at the advantages and disadvantages with a cool, clear head — and make sure that you’re not digging yourself into deeper trouble.
And always remember to read the fine print!