Payday loans are tempting, especially when you’re in a bind. Working from paycheck to paycheck without an emergency savings account puts you in a hard position when unexpected bills come knocking, and payday loans are the natural remedy.
While advertisements for payday loans make them seem like simple, fast ways to get money in-between paychecks, they also don’t mention any of the serious caveats.
Why are payday loans bad? Read on to learn more about them and how you can protect your financial future.
How Payday Loans Work
Payday loans are basically cash loans designed for the short term that operate through storefronts or online. In order to get easy payday loans (see here) is an open bank account, a reliable stream of income, and some form of recognized identification.
If you carefully read the fine print, know the exact fee amount and are confident you can pay back the loan on your next payday, this is the only time when it’s smart to get a payday loan.
First, you’ll write the lender a post-dated check that coincides with your next payday for the amount of the loan plus the finance charge.
Payday loan fees are calculated in one of two ways. They can be calculated by the percentage of the amount you borrow, or as a set amount per every dollar borrowed, like $20 for every $100.
After the check is written, the lender gives you the cash requested or deposits the money into your checking account. On payday, the lender will cash your post-dated check unless you extend the loan.
Extending the loan is also called “rolling over,” and you’ll be charged another fee each time the loan is rolled over. You can probably already see how the fees can add up until they become overwhelming.
Why Are Payday Loans Bad? The Cost
The glaring problem with payday loans is the cost. Paired with how short-term the loans are, the interest rates for payday loans are astronomical. Lenders are known to charge 300 to 500 percent, and even more.
The Debt Trap
People with poor credit and little to no savings are the typical clientele. Lenders usually fail to complete credit checks or even ask questions to ensure the loan can be paid back, creating a debt trap.
Paired with the enormous interest rates, it’s easy to become entrapped in an ongoing cycle once just one loan is taken out. One loan will create a need for a second, and two weeks later will create a need for a third.
The Debt Cycle
Instead of taking out a payday loan for emergency expenses, borrowers find themselves taking out loans to borrow more time to pay off their previous loans. This creates an ongoing cycle of debt as borrowers pay three, four, and even 10 times the amount they originally borrowed.
If borrowers are unable to repay their loans, lenders are savage when it comes to collecting. It’s common to be hounded by collection calls, mail, threats, and a court judgment.
The Quick Turnaround
It takes time to apply for loans and credit cards, but this isn’t the case for payday loans – you can receive your money during a lunch break. Although this seems like a major positive, this isn’t the case because it gives you little time to consider other solutions.
If you do think of an alternative or your friend or spouse convinces you not to take the loan after signing the papers, there’s no right to recession. It’s too late, and you’re trapped.
The Automatic Withdrawals
When the day of collection comes, most lenders will have direct access to your bank account. There will be an immediate and automatic withdrawal from your account, and if the charge doesn’t go through they may break the charge down into smaller chunks.
This can lead to multiple bank fees against you, or completely drain your bank account without your knowledge.
The Potential Harassment
While this is happening, lenders may start calling you. Although the Fair Debt Collection Practices Act should protect you from late night calls, harassing you or your neighbors in person, or threats of criminal prosecution, some lenders are still known to be aggressive.
You may also be sued by the collection agency, and they typically win because most consumers don’t show up to court. When the judge enters a summary judgment, you’re exposed to property liens, bank account levies, and wage garnishment.
The best thing to do in this situation is to show up to court and ask for proof that you owe them money, as most lenders show up without proof.
Payday Loan Alternatives
If you don’t want to get wrapped up in this predatory lending practice and end up owing thousands of dollars, here are some alternatives when you’re in a bind.
Remember to Build Your Savings
If you haven’t already created a budget, it’s important to do so. Take the necessities into account first, such as rent, utilities, car payments, healthcare, and food.
If you find you’re still strapped for cash and your budget is tightly stretched, consider taking on a temporary second job or side jobs to boost your income and reach your emergency savings account goals. Remember that every little bit adds up.
No matter what option you choose, this should always be a priority so you can get out of the debt cycle as quickly as possible!
Negotiate a Payment Plan
If you need an extension, call your creditor or utility company to negotiate new repayment terms or a longer timeline, and be honest about your struggles. Companies are willing to work with their customers because they want you to be able to pay instead of not at all.
Credit Building Loans
Avoiding more debt and paying off the debt you have is the best way to build good credit, but obviously, this is not as simple as it sounds.
Credit builder loans are designed specifically for people with bad to no credit and are offered by banks or credit unions. They work by giving you a loan that’s deposited into your savings account, and each month the bank will automatically withdraw the amount that covers the principal and interest.
Unlike payday loans, credit builder loans are for smaller amounts, have better interest rates, and have terms from 12 to 24 months. You only have to deposit enough money into the bank account cover the interest for one year. At 10 percent interest or less, that can be something less than $50 per year.
Looking Out For Your Future
It’s nerve-wracking when your bank account is drained, but you need more money for an emergency situation. It’s understandable to think that payday loans are your easiest and only option.
Why are payday loans bad? Hopefully, this article has shown you that they’re not the answer because of the high probability that they will entrap you in even more debt. They’re designed that way!
Instead, think about all the options that are available to you and remember that the situation you’re in now is temporary. You can and will get out of debt, bolster your savings, and ensure a better financial future for yourself and loved ones.
Check out more informative articles on FeedsPortal for how to work on your finances, get out of debt, and save for the future!