6 reasons why you should avoid Payday Lending
Short on cash this week? A payday loan might seem to be the perfect short-term solution. After all, it takes only minutes to apply for a small loan, the approval turnaround is quick, and the money can be deposited into your checking account within 24 hours. Ideally, you’ll pay it off with your next paycheck and get back on track.
It sounds like a great plan, but in reality, payday loans are made by predatory lenders who offer high-interest, high-risk loans to borrowers who need quick cash to cover short-term expenses. They’re notorious for kicking off a cycle of spiraling debt and are rarely the answer to a financial crisis.
Here are some important reasons you should avoid payday loans at all costs:
1. Interest rates are astronomical
If you financed your home or your car at 400% interest, would you think it was a fair rate? According to the Consumer Financial Protection Bureau, it’s not uncommon for annualized interest rates on payday loans to reach a few hundred percent. Borrowers should be prepared to repay 100% or more of the loan amount in interest and fees.
2. Hidden fees are excessive
There’s typically a $15 per $100 fixed fee charged for each payday loan. However, there are also additional fees that can add up quickly. Loan rollover and renewal fees, late payment fees, returned check fees, and debit card fees are the most common. Simply checking your balance on a pre-paid debit card or calling customer service could incur an additional fee.
3. Loan rollovers are costly
The large majority of people who apply for payday loans are unable to repay their loan within the typical 14-day repayment period. Unfortunately, that means they’ll have to rollover their loan to the next term…and so on and so on. Tack on the high compounded interest and fees and the debt becomes increasingly unmanageable and overwhelming, leaving almost no way of breaking the cycle.
4. You trade one financial problem for another
A payday loan may help you repair your car, buy groceries, pay your rent, but it doesn’t solve the long-term problem. The particular bill may be paid, but you’ve traded one debtor for another, and you’re still spending beyond your means.
5. It hurts your credit rating
A payday loan, even repaid on time, is not a plus on any credit report. In fact, lenders may even hesitate to lend money to borrowers of payday loans because it may be an indication of the inability to effectively manage their finances.
6. There are other options available
If you need a short-term loan, consider your other options. Borrow money from family or friends or your local credit union. Even a credit card, although not ideal, has a lower interest rate than a payday loan. As long as you pay it off within the month, or at least as quickly as possible, it could be a viable option. Can’t pay a creditor? Why not work out a payment plan over the next few weeks or months? Do you have some jewelry, sports equipment, or other items you could sell to raise money? Can you ask for an advance on pay from your employer?
In the long run, you’ll see that a payday loan is the least wise financial decision you can make. Although solving your immediate cash flow need is a priority, it’s also critical take a step back and take a look at your overall financial health, as well as your budgeting and spending habits.