The Problem with Payday Loans
Something unexpected has arisen for which you need cash – fast. A traditional bank loan is out of the question, you don’t have a credit card, and you’re running out of options. You’ve heard about payday loans, but you’re concerned about repaying in a timely fashion, even though there are payday relief programs if you get in trouble. With that in mind, yes, there are some definite problems with payday loans you should consider before taking one out.
What is a Payday Loan?
These are short-term loans typically of $500 or less provided by specialty lenders. They are due, plus fees, when the borrower gets their next paycheck, usually in two to four weeks. The borrower repays the loan either electronically or via a post-dated check for the total, to be deposited after their next payday.
How are Payday Loans Beneficial?
Payday loans are designed to appeal to consumers who have little to no access to conventional credit. After all, all you really need is proof of employment or regular income. Credit scores or histories are not checked, and funding is typically within minutes. The entire process is quite fast and simple.
How are Payday Loans Problematic?
On the other hand, there are reasons to avoid these loans. Say you need your car repaired. You borrow $300 from a payday lender and have a few weeks to repay it. You will likely end up forking over a $45 fee since lenders generally charge $15 for every $100. In states that are less regulated, that equivalent annual percentage rate (APR) of 400% could reach as high as 600%. By comparison, the average APR on credit cards is about 16%.
Because of the fees and short terms, many borrowers can’t get enough money together to repay the loan in time. Some states will allow you to roll the loan over to another term—which incurs an additional fee. Borrowers who can’t catch up enough to repay the primary balance end up taking out one loan after another.
What You Should Know About Payday Loans
Before you take one out a payday loan, here are things you should consider:
- You could hurt your credit. No, payday loans don’t show on your credit reports per se, but they likely will if you default. Your credit scores will suffer if that happens.
- You may not be able to pay on time. You may say it couldn’t happen to you, but the high fees and short terms that come with payday loans could have you stuck before you know it. In fact, four in five such loans wind up reborrowed, with a quarter of them reborrowed at least nine times. Fees swiftly outpace the principal amount owed in those instances.
- Those fees can pile up. In addition to the high interest rates, payday loans are known for their fees. These can be imposed for late payments, returned payments, insufficient funds, rollovers, and more.
- State rule variances. There are states that outright prohibit payday loans. Still others regulate the amounts that can be borrowed, repayment terms, the age of borrowers and other aspects.
The bottom line is that while borrowing from a payday lender can be helpful in a pinch, there are definite problems with such loans that you should first consider.
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