It’s likely that you’ve seen plenty of television and billboard ads for payday loans. These loans can be a quick and easy way to get money. However, it’s not always worth it to get one depending on your circumstances. Find out more about how you can get payday loans and how to know whether it’s a smart idea to get one.
What Are Payday Loans?
A payday loan is a short-term loan that usually requires no credit check. Also known as a cash advance, a payday loan usually lasts two weeks and has a very high interest rate. In exchange for the loan, the borrower usually has to pay a finance charge and leave the lender with a post-dated check for the amount borrowed.
If you can’t pay back the loan by the due date, the lender can still cash your check. If you aren’t going to have enough money available in your checking account to cover that amount, the lender will allow you to renew or rollover your loan instead of cashing the check.
This is where borrowers can get into serious trouble. They are forced to pay more finance charges to renew or rollover the loan. Meanwhile, the interest is piling up fast, making that final amount to be paid off higher and higher.
Pros Of Payday Loans
The following are the drawbacks of using payday loans:
- No credit checks: In many cases, you don’t have to have anything other than a pay stub from your job and a checking account in order to get a payday loan. People who can’t get loans or credit cards from other sources sometimes use payday loans for this reason.
- Fast money: You can get money in a matter of minutes and have it to use for emergencies or other necessary expenses. This makes it a lot quicker than most loan application processes.
- Convenience: Payday loans are generally easy to access. Most towns and cities have at least one payday lender. There are even simple and easy-to-use payday loan websites that can be used to have the money wired to your account.
- Get out of a jam: A payday loan can be a quick and easy fix if you have a sudden expense come up. For example, if you need some work done on your car now so that you can get to work, a payday loan could be one way to get those things paid off when you can’t wait for you next paycheck to cover the difference.
Cons Of Payday Loans
The following are the benefits of using payday loans:
- High interest rates: Compared to traditional loans, the interest rates for payday loans are sky-high. The annualized interest for these loans often fall between 200% and 500%. Therefore, borrowers have to pay back quite a bit more than what they borrow.
- Short loan terms: A payday loan term can be as short as two weeks, so that doesn’t give borrowers a lot of time to pay it back. Because the loan amount is due so quickly, many people end up defaulting or having to rollover their loan for another term.
- Future dependency: Many borrowers aren’t able to pay the loan back by the due date. They end up being forced to renew their loan, which makes it even harder to pay back and often leads to a cycle of dependency and growing debt with their payday lender.
- Unregulated lenders: Most payday lenders are not bonded, licensed or regulated by key consumer laws. This makes using them much more of a risk than going to a traditional lender. In addition to the possibility of being ripped off, your personal and financial information may not be secure.
Alternatives To Payday Loans
You should always try to look for alternatives to a payday loan before getting one since they are such a high-risk financial obligation. Here are a few of the best alternatives:
- Get a loan from a credit union or local loan company.
- Ask your bank about getting a loan.
- Request a temporary extension on a payment that is due, such as a car payment or rent payment.
- Find out what the late fee is if you don’t pay – sometimes this is less than the finance charge for the payday loan.
You should also consider taking steps to prevent the need for payday loans in the first place. The best way to do this is to create a monthly budget (and stick to it) while putting any extra money you have in a savings account to have available for emergencies.
Most financial experts strongly advise against getting a payday loan. Instead of turning to a payday lender, exhaust all the other possibilities available to you, such as getting a small loan from a credit union. Overall, you should use a payday loan only in an emergency, when no other options are available and when you know you can pay your loan back promptly.