Most of us have probably heard of payday loans, even if we have never taken one. And, it is a good idea if you have never taken one – there are a lot of dangers of payday loans that you should definitely know. Let us put it into perspective for you – this is one of the several financial arrangements you can procure with great ease; however, it is just as difficult to pay back. In this article, we will discuss some problems with payday loans and why you should avoid them.
Before discussing some dangers of payday loans, let’s start by understanding what this type is. It can be defined as a short-term and high-cost advance for a typically small amount – mostly not more than $500. This amount needs to be repaid with the next paycheck of the borrower. There are not a lot of requirements for this – you just need a bank and income account. Such advance is often provided to people that have non-existent or bad credit.
What Are Pros And Cons of Payday Loans?
There are some pros and cons of payday loans. We will discuss them in this section.
What Are Advantages of Payday Loans?
Here are some advantages of payday loans:
One of the most important advantages of payday loans is that they are straightforward to access. Most cash lenders provide the money well within 24 hours. These are available 24*7 and can be accessed online as well.
In the case of conventional advances, it does take a lot of time to apply. On the other hand, payday options can be accessed in less than five minutes.
In traditional ways of borrowing money, you need to submit many documents like credit checks, proof of income, photo ID, etc., to verify your ability to repay the principal. On the other hand, payday options have a lot fewer requirements to apply. In most cases, the only documents you require for this are age proof, government-issued ID, source of income, and an active bank account.
No Need to Get Your Credit Checked
For typical ways of borrowing money, you will require good credit to get approved. However, you do not need to have a credit history for acquiring a payday loan. Since you will not be using credit, this also means that there is no hard credit inquiry; this can help lower your credit score by several points. However, there are some rare cases where such an option will not build your credit.
Unlike a mortgage, traditional auto loan, or car title loans, payday ones are not tied to your personal property. It means that if you cannot pay back the money, the lender cannot seize your property.
However, lenders can have access to your bank account as one of the conditions. There can also be other measures – they can take you to court for the outstanding balances or send your debt to collections.
What Are Disadvantages of Payday Loans?
On the other hand, some disadvantages of payday loans include:
Depending on the place you stay, they have very high interest rates. In most cases, the interest rates may exceed 400%. In comparison, personal loans do charge between 4% and 36% interest, while credit card interest can range anywhere between 12% and 30%.
For example, if you borrow $500, you may have to pay anywhere between $55 and $102 for two weeks, depending on the interest. They are so expensive because lenders do not verify your ability to pay back the cash.
One of the most major disadvantages of payday loans is that they can be unaffordable, misleading, and unfair (depending on the company). It could potentially trap users in a cycle of debt. This is considered predatory because the high cost can escalate faster than you would expect.
There are two signs of any predatory company. For instance, the lender will not make efforts to check whether you can repay the cash or not; if you are unable to pay the money, you will be forced to roll over repeatedly, thereby accumulating new fees.
Risk of Getting Trapped in a Debt Cycle
One of the other problems with payday loans is that the borrower is always at risk of getting trapped in a debt cycle. As mentioned above, the lender will charge additional fees if you cannot repay the money and extend your contract. It has been found that more than 1 out of 4 payday loans are borrowed more than nine times.
Should I Get A Payday Loan? – Considerations
There is no doubt that there are some payday loans benefits. But, there are some reasons why should you be cautious of payday loans. Even if you want to get one, you do have to keep the following considerations in mind:
- Always read the associated fees before signing the contract. While these ways of borrowing cash are good sources of quick money, they are also very expensive.
- The borrower needs to submit a post-dated check for the repayment of the amount on the due date. Hence, ensure that your savings account has the required amount of money.
- Always look into the rate of interest before considering one. As seen in the example above, borrowing a mere sum of $500 for two weeks can cost you an additional $100.
Alternatives of Payday Loan
Should I get a payday loan? Well, experts suggest that you should avoid them. Instead, you can look into some other alternatives like:
- Ask your family or friends
- Securing a credit card cash advance
- Get an advance paycheck from your employer
- Make use of the peer-to-peer lending platform
- Make use of a Paycheck Advance app
- Visit a pawnshop
- Borrow from your 401(k)
From the above, we now understand that there are many reasons why should you be cautious of payday loans. While you may be tempted to fill out the application quickly to get quick money, they are not the best options. In fact, you could end up paying a single contract for years together. Therefore, you should always consider this option very carefully.