A payday loan provides quick access to cash but the cost can be prohibitive. (iStock)
For millions of Americans living paycheck to paycheck, an unexpected expense can be difficult to manage.
Payday ready – small, short-term loans designed to help you until your next paycheck arrives – may seem like the answer. These loans generally a no credit check payday loans and provide quick access to cash. But convenience can come at a very high price.
What is a payday loan?
A payday loan is a short-term loan that you have to pay off within a few weeks of borrowing. Loans may be available from online lenders, through payday loan applications, or from local lenders, although some states prohibit these types. The amount you can borrow is also usually limited by state law, with many states setting a limit of $ 500.
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Payday loans look attractive because they often offer same day financing regardless of your credit rating. As long as you can meet certain minimum requirements, such as proof of income and an active bank account, you can get a payday loan.
How Does a Payday Loan Work?
Unlike many loans, you don’t make payments over time with a payday loan. Instead, the entire amount borrowed – plus fees – must be repaid as a lump sum payment. Often times, you need to write a post-dated check for the amount owed or provide authorization to withdraw the money directly from your bank account.
The fees are often very high, although many states keep the costs down. Fees are often capped between $ 10 and $ 30 per $ 100 borrowed. It is significantly above average APR credit card of 15.10 percent reported by the Federal Reserve in 2019.
What are the risks ?
Because the fees are so high and the repayment terms so short, many borrowers cannot repay payday loans when they fall due and have to take out a second loan, resulting in additional fees. the Consumer Financial Protection Bureau (CPFB) found that more than four in five payday loans were renewed in the same month. And regulations aimed at preventing this type of re-borrowing are being dismantled.
Banking relationships are affected when borrowers cannot repay loans because lenders cash post-dated checks or withdraw funds from bank accounts with insufficient funds. Half of all payday loan borrowers had to pay bank charges for overdrafts or returned checks within 18 months, resulting in an average fee of $ 185. More than a third have actually seen their accounts closed, according to the CFPB. This makes future financial transactions, such as paying bills or cashing a paycheck, much more difficult and expensive.
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The high costs of payday loans also increase the risk of default, which means borrowers simply don’t pay back their loans. One in five borrowers who have taken out payday loans multiple times end up defaulting and are often subjected to aggressive collection efforts.
What are the alternatives ?
Some payday loan alternatives, like auto title loans, can be even more damaging than payday loans. These require borrowers to use their vehicle as collateral to secure a short-term loan similar to a payday loan. The lender can take the car if the borrower cannot repay what he owes.
But there are also other more affordable options that may be available depending on your situation.
If you’ve been a member of a credit union for at least a month, you may be eligible for an alternative payday loan. These offer timely approval, are easy to obtain, and allow you to borrow between $ 200 and $ 1,000 which you can pay back over one to six months. Credit unions can only charge loan processing fees, with a maximum fee of $ 20.
Or, if you are borrowing from friends, family, or employer, you may be able to avoid loan fees altogether, although company policy and state laws vary regarding availability. and the costs of payday advances. And if you have access to a credit card, making a purchase or making a cash advance to access funds could be cheaper than a payday loan although interest charges can still be high, especially for cash advances.
Ultimately, the best option to avoid a payday loan is to save an emergency fund with several months of living expenses so that you can cover unforeseen costs without borrowing. While this takes time, it ensures that high fees and interest don’t add to your financial problems when unexpected expenses inevitably arise.