Payday Loans: Beware of These Dangerous Loans
When you need cash quickly, you can consider payday loans as a source of short-term financing. Payroll loans are easy to obtain and don't require any type of credit check, making them more affordable than a personal loan or even a credit card cash advance. But are they really a good idea?
How Payroll Loans Work
A payday loan is essentially an advance on your next paycheck. You give the payday lender your pay stub as proof of income and tell them how much you want to borrow.
They give you a loan for that amount, which you must repay when you receive your paycheck, along with the payday lender's fee. The repayment period is based on how often you receive the payment, that is, weekly, biweekly or monthly.
In addition to proof of employment and payment receipt, you will also need a bank statement or bank account information to apply. Payday loans are generally deposited directly into your bank account as soon as they are approved, so you have instant access to cash.
Depending on how the payday lender processes the loans, you may need to write a post-dated check for the loan amount, plus fees.
In that case, you must sign a contract stating that the check will remain in the creditor's possession until the agreed repayment date. On the loan maturity date, you must repay the loan, in addition to any fees charged by the payday lender.
If you cannot pay the loan in full, you can ask the payday lender to extend the loan or convert it to a new loan, which usually means paying another fee.
If you default on a payday loan, the potential consequences are similar to defaulting on a credit card or other unsecured debt. Failure to pay can result in the creditor threatening criminal prosecution or check fraud. Not to mention, you could suffer damage to your credit score if the debt is sent to a collection agency.
The Easy Money Downside: Why Payroll Loans Are Dangerous
Payday loans are convenient, but that convenience comes at a cost. Finance charges can range from 15% to 30% of the amount borrowed, which can easily reach the loan's effective annual percentage rate (APR) in the triple-digit range. Even if you only have the loan for a few weeks, you will likely pay much more interest on a paycheck loan than you would on a personal loan or even a credit card cash advance.
Payday loans are often problematic for people who use them because they tend to be favored by borrowers who may not have cash or other financing options available. One of the biggest pitfalls that can occur with payday loans is when the borrower enters a cycle of repeated loan extension.
They cannot repay the loan on their payday, so they extend the loan for another payment period. They keep spending borrowed money, and in the meantime, the fees keep piling up. It is a vicious cycle that can last indefinitely since there is no limit to the number of times a person can obtain this type of loan.
Avoid the need for a budget loan The best thing you can do to avoid having to depend on personal loans is to create a budget to cover your expenses. Cut as many unnecessary expenses as possible and focus on adding cash to an emergency savings fund that you can use when cash is tight. Even the change found by the house can be used as savings and increased with interest over time.
However, generating savings takes time, and if an unexpected expense arises, there are other ways to approach it besides salary loans. For example, you can eliminate the middleman simply by asking your employer for an advance on your salary. Your employer can provide this in emergency situations without charging the fees associated with wage loans. But it's not something you want to make a habit of.
Salary Loan Alternatives
You should understand that there are other loan options available, known as Alternative Payday Loans (PAL), even if you have bad credit. These alternative financing methods include online sources and those in your local community. A payday loan should be your last resort.
You can also consider a loan from a pawn shop. If you have jewelry, tools, electronics, or other valuables, you can use them as collateral for a short-term loan for a pawn shop. You receive money for your item and you can still go back and repay the loan and get your item back within a set period of time.
The downside is that if you don't repay the loan, the pawn shop will keep your collateral. But this is often a better alternative than getting an unsecured payday loan and being hit by exorbitant fees that lead to a dangerous debt spiral. While not ideal, credit card advances can also be an alternative to a payday loan.
Ideally, you have an emergency fund in place to cover a financial crisis, but a credit card will get you in trouble. Also, instead of paying 400% APR on a payday loan, you can pay 25-29% APR on credit card cash advance loan. Finally, asking friends or family for a loan to help you get through a difficult time is another possibility.
Most people have family or friends who loan them the money they need to help with unforeseen expenses or emergencies. Usually little or no interest is added to these loans, and sometimes arrangements can be made to repay the loan in installments over time.
Remember to be clear with the person you are borrowing from about how and when the loan will be repaid. Borrowing money from friends or family can ruin relationships if not handled properly, so be sure to set realistic expectations early on.
Enjoy Watching This Video About Payday Loan
Source: The Ramsey Show - Highlights
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