What are payday loans? Do you know the places you hear about where you can get cash quickly? These are payday lenders – and they are not your friends. Payday lending depends on desperate people with few other options to keep their doors open.
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How do they work
Let’s say your car breaks down on the side of the road, or your electricity goes out because of non-payment. You have no money in the bank and your credit rating is low. A payday lender might seem like a good idea. After all, they don’t require a credit check and promise to get the money they need quickly.
According to personal loan research From The Ascent, you can end up paying 400% or more interest due to the way payday loans are processed. (As of 2019, interest rates ranged from 154% to 677%.) The average credit card interest rate is 16.16%, according to CreditCards.com’s weekly credit card rates report. And at the time of this writing, the annual percentage rate (or Annual interest rate) for the best personal loans for bad credit limits is about 35.99%. Given these statistics, charging more than 400% is the act of a predatory lender.
Part of the problem is this: In 2019, 33 states still allowed payday loans. (Several other states have put an end to this predatory lending practice.) None of the 33 states that still allow lenders to work until paycheck have a cap on interest charges.
How they keep you hooked
Whether you visit a payday lender’s physical location or take a payday loan online, lenders will make things easier for you. All they need is an identification document, proof of your monthly gross income, and a check with the date of publication. You tell them how much you want to borrow, and they ask you to write a check for the amount you took, plus the commission. They ask you to send a check two weeks later.
If you can’t repay the loan in full by the due date (and the average payday borrower can’t), you owe them the original amount you borrowed, any fees they attached to the loan, and the interest accrued over those two weeks. Let’s say you initially took out a small loan of $ 500. Two weeks later, you might owe $ 600 or more.
Hey, that’s okay – at least in the opinion of the lender. They will give you Other loan to repay the first loan. Now you need to borrow the $ 600 (or more) that you owe on the original loan and another round of commission on the loan. Taking into account principal, commissions and finance charges, you will most likely owe $ 700 or more in two weeks.
Payday lenders are not naive. They know that you have other financial obligations. It is in their best interest to keep borrowing to pay off previous loans. When you finally pay off the debt in full, they will get more money due to excessive fees and interest. Even small dollar loans can be very expensive.
We cannot tell you about payday loans without suggesting other ways to find money when you are in a difficult situation.
Consider a cash advance
If you have a credit card, cash loan may be the answer. Cash advances usually have a higher interest rate than regular credit card purchases, so we usually don’t suggest you borrow them. However, when the choice is between a cash advance with an annual interest rate of 30% or a payday loan with an annual interest rate of 400% or more, the cash advance is the clear winner. Most cash advances come with a commission and start accruing interest right away, so make a bet to pay them out as quickly as possible.
Reach out to friends and family
If you need just enough to make it through payday, the help of a friend or family member can be your ticket. However, before taking out a loan, make sure that you can repay the loan as promised. There are a few worse things than leaving someone else in trouble because you failed to fulfill your end of the bargain.
Let’s say you paid to repair your car, but now you have no money to support your family. A number of organizations offer their services. Help is available for almost everything from groceries to utility bills and transportation. Need help paying bills offers a long list of organizations they help and how to contact them.
Apply for a bad credit loan
As mentioned, borrowers with poor credit ratings can still qualify for personal loan for bad credit history… Your interest rate is likely to be high, but that’s better than paying 400% per annum.
Obtaining such a loan in installments provides several advantages:
- You will know exactly what your monthly payment will be and when the loan will be paid in full.
- You can “set and forget” by scheduling automatic monthly payments from your bank account.
- If you want to quickly pay off the loan, you can choose a short term loan.
- Personal loans available from local banks, credit unions, and online lending institutions.
- You can avoid a predatory high interest rate.
- As long as you stick to your repayment plan, your credit score is likely to go up.
In short, trying one of these options instead of falling prey to predatory payday loans is good for your bottom line.