Payday loan proponents assert that their loans enable those with bad credit or no credit at all to obtain loans, but detractors charge that these “short term” loans unfairly single out minority groups and force borrowers into protracted debt cycles.
So, how do payday loans work? Heres a breakdown to help you figure things out for yourself. This article will explain what a payday loan is, how it operates, how to apply, how state laws vary, some advantages and disadvantages of payday loans, and some responsible payday lending alternatives.
Payday loans are often marketed as a quick and easy way to get cash when you need it However, the reality is that payday loans can be incredibly difficult to repay, often leading to a cycle of debt that can be hard to escape.
Why Payday Loans Are Hard to Repay:
- High Interest Rates: Payday loans typically have very high interest rates, often exceeding 400%. This means that even a small loan can quickly become very expensive to repay.
- Short Repayment Periods: Payday loans usually have to be repaid within two weeks, which can be difficult for many people to manage, especially if they are already struggling financially.
- Fees and Penalties: Payday lenders often charge a variety of fees and penalties, such as late fees, origination fees, and NSF fees. These fees can add hundreds of dollars to the cost of the loan, making it even more difficult to repay.
- Debt Cycle: Many people who take out payday loans end up taking out another loan to repay the first one. This can quickly lead to a cycle of debt that can be very difficult to break.
Alternatives to Payday Loans:
If you are considering taking out a payday loan, there are a number of alternatives that you should consider first:
- Personal Loan: Personal loans from banks or credit unions typically have lower interest rates and longer repayment periods than payday loans.
- Cash Advance: If you have a credit card, you may be able to get a cash advance. However, cash advances typically have high interest rates and fees, so it is important to compare rates before you take out a cash advance.
- Borrow from Family or Friends: Borrowing money from family or friends can be a good option, as they are likely to charge you a lower interest rate than a payday lender.
- Sell Unused Items: Selling unused items online or at a pawn shop can be a good way to raise some quick cash.
The Bottom Line:
Payday loans should be a last resort. If you are considering taking out a payday loan, it is important to understand the risks involved and to explore other options first. If you do take out a payday loan, be sure to read the loan agreement carefully and understand the terms and conditions.
Additional Resources:
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/topics/payday-loans/
- Federal Trade Commission: https://www.consumer.ftc.gov/topics/payday-loans
- National Consumer Law Center: https://www.nclc.org/issues/payday-loans.html
Personal Experience:
I have personally never taken out a payday loan, but I have seen firsthand how they can trap people in a cycle of debt. I would strongly advise anyone considering a payday loan to explore other options first. There are many resources available to help people who are struggling financially, and there is no need to resort to payday loans.
Word of Caution:
Payday loans are often marketed as a quick and easy way to get cash, but the reality is that they can be very difficult to repay. If you are considering taking out a payday loan, it is important to understand the risks involved and to explore other options first. If you do take out a payday loan, be sure to read the loan agreement carefully and understand the terms and conditions.
Payday loan alternatives if you need money sooner rather than later
Prior to withdrawing emergency funds to pay a bill, check any deadlines for payments and the dates on which late fines begin to accumulate. Consider other consequences of late payments, and try to prioritize what you owe.
For example, many traditional lenders have a 15-day grace period before they charge a late fee. Would paying one bill a few days late (but before you incur a late fee) prevent you from needing to borrow money to make ends meet if you simply have to wait for your next paycheck?
Try approaching your landlord, your utility company, your lender, or anyone else you owe money to, if you’re going through financial difficulties, to see if they’ll work with you. It doesnât always work, but sometimes it does, so itâs worth a try. Just give them a call and ask.
In certain cases, you might qualify for student loan forbearance or deferment, or consider bankruptcy as an alternative. If you’re thinking about these options, try getting in touch with a nonprofit that might be able to assist you with managing your debt, an Accredited Financial Counselor, or another respected expert to get the support and guidance you require.
3 – Get a Payday Loan Alternative from a Federal Credit Union
Payday Loan Alternatives (PALs) are small-dollar loans that range from $200-$1,000, with loan terms ranging from 1-6 months. Many credit unions also offer financial counseling at no additional cost to their members.
The drawback of this payday loan substitute is that, frequently, you must have been a credit union member for at least one month prior to applying for this type of short-term loan. To gain access to a PAL, talk to your local credit union or bank.
Are Payday Loans Easy or Hard to Pay Off?
FAQ
Are payday loans easy or hard to pay back?
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