High Interest Rates
It is no secret that payday loans have a much higher interest rate than other types of loans, but have you ever seen just how high they can go? The annual percentage rate (APR) on a payday loan could be anywhere from 300% to 900% depending on your state’s legislation. Even the payday loans with smaller interest rates will drain you of your money if you aren’t careful. Payday loans are very easy to roll over because the lender wants you to have to pay more interest.
Some states don’t allow payday loan companies to operate, but there are very few federal regulations stopping online companies. Other states that do allow payday lending typically have very few regulations for these companies as well. As a customer, you have few rights, and some companies will even try to trick their customers into signing a contract with hidden terms and conditions that the customer will learn about after filling out the paperwork.
Credit Consequences
While other loans will actually help your credit score when you make your payments on time, a payday loan will actually harm your credit. When the credit bureau and lenders look at your credit report, they will see this loan as a sign that you are struggling to make ends meet. Other alternatives will show these important figures that you are actually trying to improve your finances and your credit, so you need to make sure you consider every option.
It is also very easy to default on these loans, which will look even worse on your credit history. If the check you give to the payday lending company bounces on the day they try to deposit it, your account will go into default, which will also cause you to get a higher interest rate.
Cycle of Debt
Many of the people who take out these loans aren’t able to get by after paying off the loan with their next paycheck. Therefore, they are forced to roll over the loan and wait until a time they are able to pay off this debt in full. The truth is, there usually isn’t a good time to do this, so they continue to collect interest while they barely make ends meet with their paychecks, creating a cycle of debt that never seems to end.
Alternatives
The good news is that you have other options. There are many other ways you can get by without having to pay a lot in interest later. While some of these options may not work for you, you should still look into every possibility because you don’t want to make the wrong decision when it comes to your finances.
- Get another job – A second job may be an option if you have enough time. You could also try to work overtime at your current job to earn some extra cash.
- Ask your employer for a cash advance – Some employers won’t mind giving you a few hundred dollars from your next paycheck when you are struggling. Sometimes, all you have to do is ask.
- Negotiate a new payment plan with your creditors – If other debt is your issue, a cash advance isn’t going to help you solve the initial problem. Lenders want their money back, so you may want to consider asking for a new payment plan that is easier for you to handle.
- Have a garage sale – Clean out your closet and get a few bucks selling the things you no longer use or need.
- Create a budget – Try cutting out a few things that you don’t necessarily need like cable or Netflix. Cut coupons to save on groceries or other necessities. Save any way you can so that you don’t have to worry about trying to live on your paycheck.
- Take out a small loan – Small banks or credit unions will sometimes give small loans to customers. It never hurts to do some research and ask about their rates.
- Ask friends or family for a loan – This is not a time to be proud. If you are struggling, your friends and family should want to help you as long as you don’t abuse their trust. If you feel it is necessary, make a contract to show them you are serious about paying them back. They probably won’t charge you interest, but even if they do, it should be way less than the interest on a payday loan.
Vanessa Lang is an author who writes guest posts on the topics of business, marketing, credit cards, and personal finance. Additionally, she works for a website that focuses on educating readers about payday loans online.
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