Payday loans are a type of short term loan that you can use to quickly get cash until your next paycheck. They are easy to get and generally online require proof of employment and a checking account. Basically you will write the company a postdated check that won’t be deposited until after you get paid again. This type of loan doesn’t even require a credit check.
Personal loans are convenient, but they aren’t the right solution for every problem. They are expensive and generally charge high fees and interest. These loans can have APRs as high as 500% if you aren’t careful. They are only a temporary solution and should be used with care and discretion. A payday loan may be right for your situation, but it might not be. Keep reading for five reasons why a payday loan might not be worth the risk.
Loans Are Expensive
One of the biggest risks associated with a payday loan is the expense. When you go in for a loan you will write a check that the company will cash at a later date. If you receive $100 you will generally have to write the check for at least $115 to cover the fees associated with the loan. Most lenders charge between $15 and $50 per $100 received depending on the length of the loan term.
Many people think that they will be able to repay the loan once they receive their next check, but this isn’t always possible. When the loan comes due if the money isn’t available the borrower will then have to take out another loan which will result in more fees. This can quickly become overwhelming and spiral out of control. Some lenders even offer roll over options which allow borrowers to have more time to repay and in turn result in more fees. As these loans roll over they get bigger and bigger and the company will simply withdrawal the renewal fee from the borrowers account each time the loan term comes up.
Some Lenders Try to Avoid Regulation
The federal government has rules regarding cash advance loans, but many lenders try to avoid these regulations by making the loan terms a little longer so they don’t have to comply. For example the government classifies payday loans as loans with less than 30 days until repayment, so lenders may offer loan terms the require repayment at 31 days so they don’t have to adhere to federal and state regulations.
Payday Loans Prey on Those with Low Income
Cash advance loans are commonly used by those with low income or low credit. This is largely due to the fact that they don’t require collateral or a credit check. Lenders realize that people with limited cash flow will have a harder time repaying the loans so they can earn more money from interest and fees, especially if the borrower lets the loan amount roll over.
Payday Loans Are For Emergency Use Only
There is a place for personal loans, but many people fail to understand that this type of loan is for emergency use only. People can quickly become trapped under a mountain of debt from these loans if they don’t use them intelligently. Borrowers run the risk of borrowing money when they don’t need it since payday loans are so easy to get.