Pay Day Loans And Better Alternatives
A payday loan is a short-term loan that is usually paid in full within two weeks or the cycle of your next payday. The amount you can borrow ranges between $100 and $1,500 depending on the state you live in.
These loans often target lower income individuals on a limited income who may need money fast to pay a bill or for an unexpected payment. It takes little time to be approved for a payday loan, all you need is to be over the age of 18, have valid ID, and proof of income. No credit score check is required which is also attractive to lower income individuals who may have a lower credit score or limited credit history.
Payday loans are also marketed as a cash advance, payday advance loan, quick cash loan, or deferred deposit loans.
First, they have very high interest charges. In comparison to personal loans (5% – 36%) and credit cards (10% – 30%) interest rates, a payday loan can run anywhere from 400% to 650% annual percentage rate. It may not appear that the charge for a payday loan is that exorbitant, however, when the fees and rate are extrapolated from the 2 week term of the loan to an annual percentage rate, the number is astonishing.
Due to the high interest rates and that they are targeted at lower income individuals, these loans are considered predatory. A predatory loan is defined as having unfair, misleading or unaffordable terms and the potential to trap users in a debt cycle. It often takes borrowers several payday cycles to pay off the original 2 week debt. Combining this recycling of the loan with such a large interest rate works to keep people in the cycle of poverty.
The Consumer Financial Protection Bureau (CFPB) showed in 2014 that most payday loans are made to borrowers who rollover their loans into the next pay period repeatedly, each time carrying more debt, and greater penalties and fees. The average payday loan is rolled over 9 times, creating a larger debt burden each time.
A normal personal loan or credit card will be reported to the three credit bureaus and be represented on your credit report and help to make up your credit score. A payday loan is not reported to the bureaus and has no impact on helping to increase your score.
As a part of the contract to obtain the loan, lenders often require the borrower to write and sign a post dated check or provide direct debit authorization to their bank account. If the loan is not repaid, the lender can cash the check or try to collect via direct deposit. If the money is not in the account, overdraft fees are applied, increasing the cost of the loan again.
If you are unable to pay the loan back, the lending company may decide to sue to recoup their money. If a judge decides in favor of the lending company, you may have your wages garnished.
Read more: Credit Counseling 101, When, Why and What to Expect
Alternatives to Payday Loans
Payday loans are an expensive way to borrow money. Learning different financial strategies can help you to find an alternative way to borrow money or reduce the need for these emergency loans.
It can be difficult on a low income to put money away for an emergency, however, any amount no matter how small will add up over time if it is saved consistently. When money is tight, the consistency of saving is more important than the amount saved. The accumulative effect of saving a small amount from each pay check will gradually increase. Having an emergency fund can allow you to weather the storm of an unexpected bill, avoiding the need for a payday loan.
If you’re struggling to pay your bills, call the bill collector or company to explain the situation. Most utility companies have different payment plans to help those who are struggling. By contacting the company, they may waive any late fees or provide a grace period for you to pay the bill. If you don’t let them know your are having difficulty, they can’t help you.
If you are truly struggling to make your payments you may benefit from a credit counseling session. Navicore Solutions is a certified credit counseling company that can take an impartial look at your budget and finances to help find a solution.
Learn more about your personal finances. Increasing your financial literacy can help you make better decisions with your money and, over time, help you to build a better credit score and increase your financial stability.
Lori Stratford is the Digital Media Manager at Navicore Solutions. She promotes the reach of Navicore's financial education to the public through social media and blog content.
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