1) Payday Loans Are Emergency Loans
Here is how a payday loan works. You apply for the loan and the lender checks only minimal information on the borrower. They usually bypass the major credit bureaus in favor of Teletrack. This allows even borrowers with bad credit to get a loan, as long as they have never defaulted on a payday loan in the past. That is why a payday loan is often someones last resort, virtually anyone can get approved.
Once approved, the borrower will be presented with an offer. The lender will charge the borrower a set fee per $100 borrowed. An example might be $20 but it will vary from lender to lender. So, if a borrower wants to get a $300 loan, they would have to pay back $360.
Loans are to be paid back in one payment on the borrowers next payday. This means that most loans will be for a period of under 14 days. This is where it goes bad. Because of the short loan term, the fees, which might not seem bad, add up to an APR of well over 400%. A $60 finance charge to borrow 300 dollars might not seem bad but 400% interest sure does.
2) Payday Loans Continue To Be Popular
Despite the high interest rate, payday loans continue to be a very popular source of lending. Lenders can make a lot of money and for borrowers, this might be the only way that they can get a loan. Millions of people take out payday loans each year and most will take out multiple loans a year.
Many states have actually outright banned payday lending and most of them regulate them to some extent. Most of the regulations are geared at limiting the amount that a person can borrow. This is a good thing because large payday loans can be very difficult to pay off. Since the loan is to be paid off in one lump sum, if a borrower can not pay the full amount back, they are often forced to renew the loan and pay a new set of fees.
3) You May Have Alternatives
What many people do not realize is that they may have alternatives to payday loans. Some of these are lower cost and some of them are even free.
One alternative, if credit is not terribly bad, is an installment loan. Many lenders will offer installment loans that are much more manageable. Breaking a loan amount up into several payments can help fit an emergency loan payment into the budget much easier. Because of bad credit, interest and fees may still be higher than a conventional loan but it is an option that might be worth looking in to.
Another alternative that has gained popularity since it came on the scene is Earnin which gives you access to money you have already earned. Simply download the app to your phone and enter your bank information and employment information. You can then borrow money you have already made and there are no fees. They simply ask that you tip when you complete the transaction. If you like the service, you should consider tipping well to keep it alive.
Yet another way to handle an emergency situation is to negotiate with your creditors. Nobody wants you to default on a loan or to miss a rent payment. Before taking out a loan, it would be advisable to cal your creditors to see if arrangements can be made. It is easier to negotiate than to send someone to collections or start an eviction. Car payments can often be pushed back to the end of a loan. Credit card payments can be made interest only. Rent payments can be broken down and split over several months. There are a lot of deals that are possible that could keep you out of a loan.
4) Payday Loans Have Positives
Believe it or not, the payday loan does have some positive characteristics.
As a last resort for those with very bad credit, it can be a savior. What if, for example, you needed to have a tooth pulled but could not afford it. In such a case, a payday loan would be very worthwhile. If you have ever dealt with tooth nerve pain, you would understand.
The trick is to use payday loans responsibly. Before accepting a loan, you must figure out how you are going to pay for it. If you do not have enough money on your next check to pay off the loan, do not get it. Also, you need to use the loan only for necessities. Using the loan to finance a watch, for example would be a huge mistake but if you need it to put food on the table, that is another matter.
5) Payday Loans Have Negatives
On the flip side, payday loans also have negatives. Probably more negatives than positives to be truthful.
The biggest negative about thee loans is the high fees. Lenders are quick to tell you that these are risky loans and they would not be able to make them without the fees. While that might be true, it does not make the fees any easier to stomach, especially if someone is forced to roll the loan over a few times.
The other negative is that while lenders are regulated, they may not be regulated enough. They often lend to borrowers with not enough investigation as to whether they can actually afford the loan. So, just because an offer is extended do not assume you can afford it. That is a decision that you must make by looking at how much money you make and the other bills that you have to pay.
