Should You Get Payday Loans? Everything You Need to Know

A payday loan can be a tempting choice to help make ends meet or access money fast if you’re short on cash between paychecks or have an unexpected financial emergency. These short-term loans, which are usually due on your next payday, are, nevertheless, exceedingly dangerous. They have high-interest rates and other expenses attached to them.

Payday loans are frequently advertised to those who can least afford them—those earning less than $40,000 a year. While payday loans are touted as short-term loans, they can trap debtors in a debt cycle that is difficult to escape.

What Is a Payday Loan?

A payday loan is a short-term loan that does not require securitry and can last anywhere from two to four weeks. These loans are typically expected to be repaid in full with your next paycheck, when you receive Social Security income, or when you receive a pension payment.

Payday loans are often provided for small amounts, typically $500 or less, with the average applicant receiving a payday loan for around $300. Payday loans can be for bigger amounts in specific instances.

Borrowers must submit a personal check for the amount of the debt plus any finance charges and fees in order to obtain a payday loan. The creditor will deposit the check to reclaim their funds if the loan is not paid back on time. Instead of requesting a personal check, some creditors may request authorization to electronically debit cash from your bank account.

Why Do People Take Out Payday Loans?

Despite the payday lending industry’s claims that it provides emergency funding, most debtors utilize these costly loans to pay for ongoing costs such as rent or mortgage, groceries, and utilities. These findings suggest that, rather than providing emergency relief, payday loans siphon huge amounts of money from debtors’ budgets that would otherwise be used to satisfy recurrent obligations.

Payday loans are more typically used by debtors who are experiencing chronic cash flow problems rather than those who are experiencing a financial emergency. Individuals living in underserved neighborhoods and towns, as well as those who do not have a bank account with a large financial institution, frequently use these types of loans.

Instead of providing a financial safety net, payday loans turn into a financial fastball aiming right at its own consumers’ heads.

What Are the Risks Associated with Payday Loans?

Payday loans are sometimes regarded as predatory lending due to the numerous risks involved with them.

To begin with, payday loans can have exorbitant interest rates. Those who take out these loans must pay anything between $15 and $30 for every $100 borrowed. With a two-week repayment period and a charge of $15 for every $100 borrowed, a typical payday loan has an APR of roughly 400 percent.

Many payday creditors also provide rollovers or renewals, which allow you to pay the costs of borrowing the money on the due date of the loan and stretch the balance due for a longer period of time. This can be a slippery slope that leads to debtors swiftly getting into debt as fees and interest accumulate. According to the Consumer Financial Protection Bureau, debtors default on one out of every five payday loans.

Furthermore, because payday loans do not take into account an applicant’s entire financial picture, including their ability to meet other financial responsibilities and meet living expenses while repaying the payday loan, debtors are frequently trapped in a debt cycle.

Should I Take Out a Payday Loan?

Payday loans, according to experts, should be addressed with caution. They have the ability to resolve a short-term money dilemma. However, if you are unable to repay your original loan with the money you have left over in order to avoid borrowing another, they can cause you much more issues. When unable to purchase essential supplies or pay bills, however, the money instinct does not override the urgency many individuals feel.

If you need money but can’t borrow responsibly from family or friends, look into short-term payday loan options first. They will provide you with a little loan from your credit union, bank, or small lending firm. To ensure that it is a better option than a payday loan, read the tiny print to comprehend any connected fees and interest rates. If you must take out a loan, look for one with the lowest costs and interest rates.

Alternatives to Payday Loans

Investigate other options that may be less expensive before taking on the major financial risks connected with a payday loan. Here are some alternatives you can consider:

• Taking out a loan from relatives or friends: Payday loans should only be used in extreme circumstances. If you have willing relatives or friends, borrowing money from loved ones rather than a predatory creditor may be a better option.
  
• Home equity financing: You can avoid high APR payday loans by tapping into your home equity. Home equity loans are a convenient way to retain extra money in your pocket.
  
• Personal loans: A personal loan might be a safer and more cost-effective borrowing alternative for those with good credit. Furthermore, if you require funds immediately, online creditors can give personal loan funds in as little as two days.
  
• Payday alternative loans (PALs): These are short-term loans given to credit union members who require quick cash. Fees are controlled, and the number of payday alternative loans you can take out per year is limited. If you have a short-term financial need, these loans are far cheaper than payday loans.
  
• Credit cards: Credit cards may have high-interest rates, but they are unlikely to be as high as the costs of a payday loan. For a modest cost, some credit cards also offer installment or pay over time programs. You might be able to get a cash advance to use some of your available credit. Just remember to pay off the advance as quickly as possible, as cash advances have a higher interest rate.