Avoiding The Bad Side Of Payday Loans
Now, some people will say that everything about payday loans is bad. Payday loans, however, can be a great deal for many people and are a very useful tool. For many people, they are the only source of emergency cash available. They are however, very easy to abuse. Before you get involved in payday loans, read about some of the not so pleasant things about the industry.
Below you will find some of the big negatives of payday loans. The things that lenders do not tell you. The thing you must remember is that payday lenders are like any other business owner. They are in it for their own best interest. You need to watch out for your own back. This is why we list the hard truths about payday loans and how to avoid these bad situations.
1) 80% of payday loans will be rolled over within two weeks. (Yahoo Finance on 8-13-14)
What this means is that people are unable to pay back their loans on time and are extending their loan. This comes with fees and increases the total amount that the borrower will have to pay. Borrowers could easily find themselves paying on the same loan for months.
To avoid this situation, you should do several things. First, you should always determine if you will be able to pay back the loan before you accept it. Do not count on your lender to judge your financial situation. Write out your bills for the next several weeks to a month and see where you can fit in the repayment of your payday loan. If you do not see it is possible, if there are no cuts that you can make to your budget to accommodate it, you should not take out the loan even if you need money now.
In addition, before simply rolling over your loan, you should check with your state to see if there are other options available to you. Some states, for example, require lenders to move your loan into a no charge installment loan. You can not count on your lender to give you this information, you should now your rights. For information on your rights, consult your state department of banking.
Finally, if you must roll over a loan, be sure to pay a portion of the principal. If you only pay the fee to roll the loan, you will be no better off next time than you are now.
2) 20% of Payday Loans Cost The Borrower More Than The Amount Borrowed (Yahoo Finance on 8-13-14)
The cause of this is the borrower continually rolling over the loan. The fees add up until the point is reached that the fees exceed the original amount borrowed.
To avoid this situation, you should do the same as the above. Avoid taking out more than you can afford to pay back. Do not get yourself into a situation where you will have to continually roll the loan over again and again. Once again, your lender will not sit down and carefully evaluate your finances to determine if you can afford the loan. This is not a mortgage. They will do a cursory check of your finances to judge if you can seemingly afford the loan. The responsibility is yours to judge if you can pay it back on time. If you can not, it would be best to do without.
3) Average Payday Loan Rates Are Over 300% On A Two Week Loan (Philadelphia Inquirer, 6-23-13)
Not much you can do about this one, the interest rates on payday loans are high. This is, after all, a high risk loan for lender. If they were making 20% interest, the incentive would not be there to issue these loans and they would not be available to those who needed cash.
The actual reason for the high interest rate on payday loans is the fact that lenders are actually charging fees based on the amount borrowed. So, for a $100 loan, a lender might charge $20. That is really not that bad if you think about it. You borrow $100 and pay back $120. It looks bad when you calculate in the short loan term of around two weeks. When you do that, the interest rate winds up being around 400%.
4) The Average Payday Loan Is Double The Expense of A Credit Card Late Fee
Absolutely true, there is no disputing that. That is why you should not take out a payday loan until after you have analyzed the cost. If the cost of the loan is $60 and you would only save $30 in fees, you would be crazy to take out the loan.
There are two reasons to take out a payday loan. One time that you should take out a payday loan is when the fees for the loan are less than the cost. Add up all the fees and penalties and if they are more than the loan cost then the loan is obviously a good deal.
Another reason to take out a payday loan is is you would be without food, shelter or medical care without it. Need an emergency root canal and have no other source of income, a loan is probably a good idea. Facing eviction without an emergency loan, then a payday loan also might be a good idea.
5) Most Borrowers Will Take More Than 8 Payday Loans Per Year
This is a statistic that is thrown out a lot. On the surface, it shows that people become dependent on payday loan. If you look closer it might be that the truth is that payday loans are the only source that people with bad credit have for loans. This is why they take them out over and over again. Not everyone is trapped using payday loans, they just have no other banking options.
To remedy this, you need to do two things. First, you need to get your budget in check so that you can start a savings account. Write down all of your bills and see where cuts can be made. You should be able to save at least 5% of your paycheck. If not, you need to eliminate or reduce expenses. Make hard decisions. Choose a cheaper place to live. Drive an older car, whatever you have to do to save and become financially stable.
Next, you need to fix your credit so that you can qualify for more traditional financing when needed. Pay your bills on time. Pay your balances down to below thirty percent on credit cards. Dispute negative information on your report. With good financial practices, even a poor credit score in the 500’s can be brought to an acceptable one of around 650. Then you can easily qualify for an emergency credit card that you can use in place of payday loans.
You might also be interested in reading this article if you need money.
6) Payday Loans Are Too Easy To Obtain
This can be true. Payday loans are very easy to get. Lenders do not have a lot of time or information in front of them to judge your absolute ability to pay back a loan. All they can do is look to see that you have income, have an address and a bank account and that you have never defaulted on a payday loan before. They use this limited information to determine if it is worth the risk lending to you. This can lead some people to qualify for a loan who probably should not qualify.
To solve this problem, you need to be true and honest to yourself. Be financially responsible enough to look at your own big picture and see if you can really pay this loan back. If you can not, you should avoid the loan. Taking out a loan when you know that you can not pay it back is just adding to your problems. If you are going to wind up in debt, why add another creditor to the mix.
Payday loans like all loans have their share of problems that go along with the good. It is therefore up to you as a smart consumer to use this type of loan correctly and only at times where they are appropriate.