Are Payday Loans Bad?
August 8, 2019
Payday loans are bad because of the very high-interest rates and fees that cause borrowers to get stuck in a vicious cycle of financial problems. Many payday lenders are predatory and people have difficulty paying them off, getting stuck in an ongoing cycle of debt.
Before you take out this type of loan, first evaluate the risk. Let’s breakdown what exactly a payday loan is and why you should be wary of getting into a dangerous cycle.
What is a Payday Loan?
A payday loan is a short term loan for people who need cash very quickly. Lenders provide payday loans through storefronts typically, but they’re also available online. It’s expected that you pay back the loan in a short time, usually within two weeks.
If there is an emergency and you have bad credit, no savings, and no other options, a payday loan is an immediate solution. For example, medical bills, home repairs, or other unexpected expenses may come up.
People with bad credit typically turn to payday lenders. These types of loans are easy to get, don't typically require a credit check and usually have high-interest rates.
How Do Payday Loans Work?
Paydays work in four simple steps, which are:
- Verification: The payday lender verifies your income and a verified bank account. By checking your income, they’re confirming your ability to repay.
- Write a postdated check: The lender requires that you write a postdated check for the loan amount and the interest. This ensures the lender will be paid back by the scheduled date.
- Money is deposited: When your loan is approved, the money is deposited into your bank account.
- Payback the money: If you don’t pay the debt in full at the end of the term, you will be charged additional fees.
The biggest problem with a payday loan is the cost. Interest rates are very high making it difficult to pay back if it’s not paid on time.
This traps borrowers in a cycle of debt that is difficult to break. It draws out the loan that started out short-term and often, creates the need for another payday loan.
The average annual percentage rate for a payday loan is 400%. If a borrower doesn’t have the $1,000 to pay in the first place, it’s likely they’ll not be able to afford the interest that piles on after just two weeks.
If you’re in an emergency and need cash fast, you may want to consider borrowing money from a friend or family member, rather than ending up in a financial hole you can’t get out of. Or, consider one of the alternatives we have listed below.
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Alternatives to Payday Loans
If there’s an emergency and you need money, there are other solutions. Keep in mind that with any option, your first priority should be to pay back the loan or money right away. Here are some helpful alternatives to payday loans to consider:
- Try your financial institution first
- Find a cosigner
- Charge the amount to your credit card or use a cash advance
- Borrow from a friend or family member
- Ask your employer for an advance
- Apply for a small loan
- Request more time from your creditor
How to Avoid the Need for Payday Loan
Save for Emergencies
If you're worried about what to do in case of an emergency, you should try to save some money from each paycheck, even if it's a small amount.
Starting an emergency fund can help you if you need extra cash on a rainy day. Having an emergency fund can give you a sense of financial security, even if you have a bad credit history.
Fix Bad Credit
Bad credit is usually anything under a score of 600, but it depends on the credit scoring model being used. Check your score to determine your chances of getting approved. If you do get approved, you'll probably have to pay higher interest rates and fees. Lenders see you as a high risk, or someone who isn’t reliable to pay back the money borrowed.
Another way to prepare for an emergency is to start improving your credit. You can do this by first checking your credit report. If you find errors on your credit report, fixing them could potentially raise your credit score.
If you have bad credit, you may want to wait before you apply for a loan. If you can fix your credit before applying, you may have a better chance of qualifying or getting a better interest rate. If you need to borrow money immediately though, then remember to shop around and compare interest rates.
If you have bad credit and need help fixing it, contact the credit specialists at Lexington Law Firm. Our dedicated team of attorneys and paralegals have over a decade of experience with helping client fight for their right to a fair and accurate credit report. Give us a call today for a free credit consultation to see how we can help.