Have you ever taken out a payday loan? If you have, you already know how much damage this type of loan can cause. If you haven’t, thank the heavens for that, because these loans aren’t a good idea. It’s like signing a contract, yet you don’t know the exact details, making it difficult to terminate.
This brings us to the next question: what is a payday loan?
What is a Payday Loan?
In simple terms, it’s a loan with an extremely short repayment period. In fact, it may not go past a month. You’ll get these loans from lenders with physical locations or even online thanks to technological advancements—one of the main reasons 12 million Americans take out these loans.
Often, people in tight financial situations seek these loans because applying takes a few minutes. The lender will evaluate your checking account and income to assess your ability to repay the loan.
What about the checking account, you ask? Well, that’s where the first reason why this loan is a bad idea arises. After approval, you’ll have the funds available in your checking account. However, the lender will require you to issue a postdated check, and this will be for the interest charged plus the principal amount.
Therefore, if you took a $100 loan today and the lender wants the money back in two weeks, you’ll write a check with a date two weeks from today. This will be for the total amount, $115 – the loan ($100) and the interest ($15).
This means the lender is assured you’ll pay the money as agreed, saving them the stress and effort of having to chase you down. Sounds harsh, huh? However, you’ll agree to the terms because you need the money fast and the lender doesn’t care about your credit history.
The lender will want your paycheck deposited into the account you provided and will set the date for the postdated check to match that of your paycheck deposit. This is why it’s called a payday loan.
Why it’s Never OK to Take Out a Payday Loan
The cost of these loans is what stands out from the list of problems. In the example given earlier on, you need to pay a whopping $15 in interest for a $100 loan. Spread out this interest for an entire year and it’s not much for a borrower with bad or no credit at all.
However, with a payday loan, you’ll have to repay this loan in only two weeks. If you look at this interest through an annual lens, you’ll see that it goes past 300 percent, if you’re lucky. Often, they range from 400 to 500 percent or even higher.
Even worse is that the people who can’t afford the interest end up taking these loans. You didn’t have the $100 today, there’s no guarantee you’ll have $115 in two weeks, and that’s where the situation goes from bad to worse.
The Vicious Cycle
Once you take out a payday loan, it’s almost a guarantee there’s no way out. You take out one, and it creates the need for another and another, and the cycle goes on.
Since you don’t have money to pay off what you owe, you’ll run back to the lender asking for a second one to clear the first. It’s important to keep in mind you went for the realistic online loans no credit check because you didn’t have money in the first place – an emergency fund to be specific.
Your income will be depleted by household expenses and after two weeks, the situation will not be any different. To make matters worse, the lender will continue providing funds by postponing loan repayment every two weeks. Also, the lender will require you to pay the interest every two weeks while the initial loan remains outstanding. Don’t be surprised when end up you paying up to $1,000 in interest for a $100 loan.
Lenders know the type of borrowers who come knocking on their doors, and that’s why they generally don’t lend more than $1,000. They know the borrower is unlikely to repay the loan, especially if the size of the loan is huge.
Once you’re unable to pay off the loan, these lenders can be nearly inhuman when it comes to collection. You’ll not only have to deal with threats, but chances are also you’ll be served with a court order.
Payday Loan Alternatives
Now that you’ve seen how payday loans can wreck your financial life, it’s time to consider other alternatives. In fact, almost all other alternatives will be cheaper than taking out a payday loan. Here are some of the most common alternatives:
- Alternative payday loans: These loans are available at credit unions and are often issued to the members. They also come with short repayment periods and are suitable for people in need of quick cash. The bottom line is these loans are way cheaper than payday loans.
- Credit cards: This is a cheaper alternative compared to what you’ll come across with a payday loan. Yes, the interest is also expensive when paying with a credit card, but it doesn’t even come close to what payday loans charge.
- Personal loans: These loans offer low interest rates, especially if you have a good credit score. They are lower than what credit cards or payday loans offer, and the best part is that you get to agree on a fixed repayment timeline. In addition, you’ll also have fixed monthly installments to help you plan ahead. This means this type of loan is even better than a credit card.
Try asking your family and friends for help, hold a garage sale for items you no longer need, or starting a side hustle—anything before applying for a payday loan.
Wrapping Up
Payday loans are never a good idea. You’ll end up trapped in a vicious debt cycle. The only time that’ll make sense for you to take out a payday loan is after exhausting all other financing opportunities (every single one). Otherwise, you’ll have set a timer to a financial bomb and when it goes off, you’ll be in a worse situation than you were in the beginning.