It’s likely that you have heard or seen the advertisements for payday loans. Often, they are enticing enough to grab your attention. A payday loan may seem like an easy option when you are in a tight situation: receive a small advance on your upcoming paycheck to cover immediate expenses and when you later receive your paycheck, you can pay back that small advance plus interest. While they seem, and are advertised as, small, personal loans, payday loans are potentially problematic. Rather than getting a one-time, quick fix to cover unforeseen expenses, many borrowers of these loans find themselves having to spend so much
of their paychecks repaying the loan that they need additional loans to cover their regular, monthly expenses.
To help you determine if a payday loan will work for your situation, or possibly make it worse, we’ve included some information that will help you learn about payday loans and how costly they can be.
What are payday loans?
Payday loans are typically offered by specialized lenders or businesses, rather than credit unions. They work similar to loans in that you borrow a certain amount of money with the intention to pay back that amount plus any interest that has accrued. Unlike other types of personal loans, payday loans often have very high interest rates and other fees associated. If that’s the case, your small payday loan might become quite large and difficult to manage within your budget.
Why are they used?
Payday loans are often used in emergencies, when cash is needed quickly. If used, it’s crucial that the loan is repaid as soon as possible to avoid additional fees and exorbitant interest rates. With many payday loan lenders, a credit check is not required. This may seem attractive to borrowers who are unable to qualify for credit cards or accounts elsewhere.
What are alternatives to payday loans?
Because payday loans can be risky due to their high interest rates, you may want to consider some different lending options. Some of these options could also be helpful if you’d like to break a payday loan cycle. These include:
- Borrowing money from your savings accounts
- Overdraft protection services
- These are helpful if you are unable to pay a bill and your credit union offers a service to help pay certain transactions for a small fee
- Negotiate different payment plans on your bills
- A small personal loan from your credit union
- Credit cards
Before you explore the possibility of using a payday loan service, be sure to thoroughly research and determine if it will be helpful or hurtful to your finances in the long run. Also, be aware of how soon you can repay a payday loan. If you are unable to repay the loan quickly, it could damage your financial situation and credit worthiness, which may take a significant amount of time to repair.