Top 5 Reasons to Avoid Payday Loans at All Costs
You have no doubt seen the advertisements on television for quick and easy payday loans. All you have to do is write a post-dated check for the amount you want (plus their fee) and you can walk out with your cash. Sounds pretty simple, right? Well, not exactly. These services cater to people who need cash fast for one reason or another, generally to pay for unexpected bills or catch up on payments they’ve gotten behind on. So you get an advance on your paycheck, for what seems to be a relatively small fee, and before you know it, you’re up to your eyeballs in debt for a loan that should only have cost you a few dollars. As with everything that revolves around money-lending, there is a catch. And here are a few of the reasons you should avoid payday loan businesses (and their nefarious hidden agenda).
1. Astronomical interest rates. For starters, most payday loans require that you pay an up-front fee that is generally about 20-25% of the amount you want to withdraw. You write a check for this amount as collateral and you have 15 days to pay it back. If your check clears at the post-date, no problem. Your transaction is done and you’ve only lost $20 for every hundred you borrowed (not great, but for a one-time deal, it could be worse). If, on the other hand, you default, you open yourself up to a world of additional fees that could add up to 50% for each month that you’re late, up to a cut-off amount of 520% of the original loan. It doesn’t sound possible, but it is.
2. “Easy money” is a heinous misnomer. If you think these people are trying to help you, you’d better think again. While it would be a stretch to call this a scam (since it’s perfectly legal, albeit unethical) it certainly pays to read the fine print. Companies that offer payday loans are banking on the fact that you won’t be able to pay. The real money starts rolling in when you default. You will have to make a minimum payment each month to avoid going into collections, but in the meantime, you may hit the six-month mark and realize that you have paid off your initial loan amount, but only towards interest, and in fact, you still own the entire principle amount (or more).
3. You have other options. If you are hard up for cash, a payday loan should be your last option, not your first. Although you may have to eat some crow, consider asking family or friends for help first. Make a contract to pay them back and do so in monthly installments that you can handle. They probably won’t even charge you interest (or if they do, it should be lower than prime…and far less than a payday loan). Or consider going to your bank for a short-term loan if you have good credit, or even consolidating other loans in an attempt to lower your monthly payments.
4. Even credit cards charge less! Most credit cards offer the option of taking out a cash loan against your credit, and often they charge less than the 20+ percent required by a payday loan establishment. If you have the room on your card, you should definitely consider this as a much more affordable loan (especially since the interest rate remains constant from month to month).
5. Financial ruin is closer than you think. You can really get yourself into trouble with payday loans because of renewals. Failing to make the one-time payment you had intended (because if you’re behind one month, the chances of catching up by the next month are pretty low), can quickly land you in collections with a lot of debt racked up. You’d be a lot better off haggling with whomever you owe money to as a way to reduce your payment or get an extension (or even pay their late fee) rather than selling your soul to the devil that is a payday loan institution.
Sarah Danielson is a writer for Pick Up Artist where you can find great tips and advice on dating.
