You’re tight on cash and payday is still a week away. The bills are piling up and you’re beginning to feel desperate.
A payday loan is starting to seem like the only answer to your cash flow woes. Is it a good idea?
What is a payday loan?
Payday loans — generally provided by non-bank entities — offer you an “advance” on your salary for a fee. They typically have a quick repayment period in the neighborhood of two weeks, by which time you’ll get your next paycheck (thus the moniker).
You secure the loan with either a postdated personal check for the payoff amount, or by providing electronic access to your bank account if you’re using an online payday loan company. If you don’t repay the loan in cash by the due date, the payday lender will cash the check or raid your account.
If you’re facing an unexpected expense and are considering a payday loan to cover it, we’re here to ask you to think again.
It may be tempting to take the fast cash, but here are five ways a payday loan can send you deeper into debt:
1. Interest rates on payday loans are outrageous
According to paydayloaninfo.org, the interest rates on payday loans are typically 400% or more. Why do people sign on the dotted line, then?
The fact that the loans themselves are for relatively small amounts (usually $100 to $1,000), have such a brief term, and have interest rates that may be expressed as a fee instead of a percentage, disguise the fact that you’re getting the raw end of the financial deal.
Even a cash advance from a credit card is cheaper — not that we recommend that, either.
2. Payday loans are Band-Aids disguising bigger problems
If you don’t have the money to cover your bills and other financial needs today, what makes you think you’ll have enough PLUS extra to repay the loan two weeks from now?
Your time is probably better spent combing your expenses and looking for ways to cut back. Alternatively, you could take on a side gig and earn more — check out these 30 ways to turn your talents into extra income.
3. Payday loans can become a vicious cycle
No credit check payday loans don’t conduct credit checks or perform other due diligence to see if you have the financial wherewithal to pay them back. As a result, those who find themselves short at the end of the repayment term may find themselves taking out another payday loan from another company to cover the first one, or allowing their original loan to roll forward for an additional fee.
4. Payday loans can lead to bounced check fees
If you don’t repay the loan and your check is cashed (or in the case of an online payday loan, your account accessed electronically), you’ve not only paid the original, exorbitant interest rate, you’re also on the hook for overdraft or bounced check fees.
In addition, if you develop a history of bouncing checks or overdrawing your account, it can lead to a poor credit score and make it that much more difficult to access more traditional lines of credit, perpetuating the cycle. Your bank might even close your account and it could be difficult to find a new bank that will take you.
5. Payday lenders by other names can leave you open to other risks
Some states have outlawed or tightened restrictions on payday advance loans. However, rather than letting that put a crimp in their style, payday loan companies have branched out.
These lenders may offer installment loans or lines of credit to get around being classified as payday lenders. Or they might operate under another business model altogether, offering car title loans instead of payday loans. Great — now your ride’s on the line. Ugh.
Alternatives to payday loans
So if you were asking yourself “Are payday loans safe?” then it’s safe to say the answer is no, they’re not.
In fact, payday loans almost always do more harm than good. Fortunately, there are alternatives. In the short-term you could try the following:
- Obtain a personal loan from your bank or credit union
- Charge the expense to your credit card or get a cash advance
- Borrow from family or friends
- Ask your creditors about repayment plans or hardship assistance
- Use your overdraft protection, pay your bills, and owe your bank a fee
Obviously, none of these are great solutions. But just about anything beats taking out a loan with an interest rate of 400% or more, plus all the other negatives outlined above, when you’re facing dire circumstances.
In the long-term, however, what you want is a solution that prevents you from being in such a precarious financial situation to begin with.
Ultimately, the only route to liquidity is for your income to exceed your expenses.There are only two ways for that to happen: either you increase your income, or you reduce your expenses. If you want to supercharge your savings, you can do both.
Of course, that’s easier said than done. We get it. However, falling into the payday loan trap is not going to solve your money problems either. Focus on healthier ways of obtaining wiggle room in your budget so you can build an emergency fund and never again have your entire financial life derailed by one bad day.
Interested in a personal loan?
Here are the top personal loan lenders of 2018!| Lender | Rates (APR) | Loan Amount | |
|---|---|---|---|
1 Includes AutoPay discount. Important Disclosures for SoFi. SoFi Disclosures
2 Important Disclosures for Citizens Bank. Citizens Bank Disclosures
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 | 7.73% - 29.99% | $1,000 - $50,000 | Check rate nowon SLH's secure site |
 | 5.37% - 14.24%1 | $5,000 - $100,000 | Check rate nowon SLH's secure site |
 | 8.00% - 25.00% | $5,000 - $35,000 | Check rate nowon SLH's secure site |
 | 4.99% - 16.24%2 | $5,000 - $50,000 | Visit Citizens |
 | 5.99% - 35.89% | $1,000 - $40,000 | Visit LendingClub |
 | 5.25% - 14.24% | $2,000 - $50,000 | Visit Earnest |