There are times when things get tough financially for different reasons, and these desperate times can call for desperate measures. Payday loans (also called a payday advance, cash advance loan or small dollar loan) may seem like a viable option, but in reality, they come with many dangers.
What are payday loans? These advance money arrangements are temporary small-cash loans with the expectation to be repaid by the next paycheck. If you are in a bind for $500, this can be tempting to look into and consider, especially in the event of a financial crisis. You may want to reconsider, though, for the following reasons:
- High interest rates. This is one of the biggest risks that come with a payday loan. Even when offered a low-interest rate, these often come with a catch such as only allowing a certain amount in order to receive the low interest. Commonly, you are charged $15-$25 per $100 borrowed. Companies offering cash advance loans rely on your sticky situation, making you feel like you have no other alternative and use this to their advantage to make a profit through these high interest rates. These rates are not always made clear, which can put you in a bind if you are not prepared to repay much more than what you actually needed. This can spiral your finances further out of control.
- A short loan period. Payday loans can seem appealing in emergencies because the money is placed into your hands very quickly; however, this also means that you have to promptly repay the loan amount (plus fees). If you are late in repayment, the charges rack up quickly, pushing your repayment higher than the original loan amount. Many who choose to do a payday loan may feel like this will not affect their credit, since there are no credit checks when you apply for the loan. This is incorrect, and it does in fact affect your credit negatively. When you sign up for these short-term cash advances, you sign a contract stating you will repay by your next payday. While these terms are based on how often you receive a paycheck, it can still throw you for a loop if you need to extend your repayment date.
- Lower income preying. Because these loans do not follow traditional credit checks, payday loan companies frequently prey on lower income individuals. It seems like easy money and is essentially like getting your paycheck early, but the risks far outweigh the so-called convenience. You do obtain the funds quickly, either in the form of a check or debit card or directly deposited into your bank, but very few allow you to repay in payments, mostly expecting loan payment in full. It can become a dangerous and never-ending cycle for those with lower incomes, and, as we mentioned briefly before, these companies prey on those facing tough times.
Because of the above mentioned dangers of payday loans, we highly recommend trying to steer clear of these as an option during difficult economic times. Weigh out all other options first. This is why you should always be preparing for the future financially, having an emergency fund and a budget.
If you must apply for a payday loan, just be sure that you are able to repay the amount in full and then some by your next paycheck.