Payday loans are short-term loans that are available as a cash advance against your paycheck. You have to show the lender the proof of the salary and give a postdated check, whose date is generally a month after releasing the loan. There is no credit check to get this loan approved.
Payday loans are lucrative financial solutions in case of emergency, when you have a short-term cash crunch. However they can be very risky for the inexperienced borrowers or the people who cannot control their cash flow. Fees that initially appear to be low and affordable can grow into a huge amount within a few months. Some loans carry an APR starting from 300% to a very steep 600%.
Though not a bad alternative, they can easily go out of control. While they offer short-term cash solution, they also carry high risks that at times can be far more than the benefits.
Remember these 7 tips why you should keep the payday loan as the last option.
1. The net amount you get is lesser than the amount written on the check. The lender will take finance charge from the loan amount as his profit. This charge is generally $15 to $50 per $100 during the pre-determined duration of the loan. You have to draw a check with the loan amount + fees. If you fail to comply, you will have to pay stiff finance charges.
2. The account balance may fall short of the check you have issued to the lender. Once the loan is due and you fail to pay, the lender will generally persuade you to roll or renew the loan. Now you have the burden of bigger loan with late fees and extra finance charges. You might even use the borrowed money to pay the steep fees.
3. The state regulations stipulate that the loan term should not exceed 30 days. But the lenders sidestep this issue by giving loans whose term is at least 31 days, putting you at the lender’s mercy.
4. Payday loans are emergency loans and are supposed to be repaid quickly. But most of the times, this does not happen. Since the borrowers consider this type of loan cheap and convenient, they let it roll over. This causes the loan amount to swell unless the borrower has sufficient funds to repay the loan at once.
5. Payday loans are risky as they are meant for people with low-income, who would not get the normal loans. Lenders ignore the fact that people who already face cash crunch will experience more problems in repaying the loan.
6. Some payday loan sites automatically ‘roll over’ a loan and charge the renewal fee on the date of the expiry of the loan. Other sites necessitate the borrowers to accept a contract that prevents the borrowers from filing bankruptcy or taking legal action against the lender. This means the borrower shields the lender.
The payday loans can be addictive and become a regular option instead of the emergency one, if there is no other means of funding. Due to their easy availability and approval, these loans can be tempting.
If there is a need to borrow against your pay, ensure you get all the facts straight and understand the downside of the loan. Try to search for the lender offering the lowest rate and find out about the various fees included in the loan, to get an idea of the exact amount you will get, the final amount you will pay and the time limit.
If there is a problem due to payday loans, consult institutions offering or low-cost aid in negotiating and lowering the interest charges and effectively your monthly payments. You should also improve your money-handling skills to reduce or eliminate totally the necessity to take these loans to meet the expenses.
Payday loans are excellent short-term solutions to meet urgent money needs but if you throw caution to wind, you can sink deeper into the debt trap that can become a liability. To minimize the risk of a payday loan provide for adequate funds to repay the loan when the due date approaches and pay on time