Payday loans were invented as a quick loan process to get you money when you can’t make it to your next paycheck. People can obtain a few thousand dollars with less than perfect credit and are expected to make payments on their paydays.
If it sounds too good to be true, it usually is. Payday loans feature incredibly high interest rates and fees that gouge you if the money isn’t paid back almost immediately. They should be regarded as a very last resort, and there are often better options for easy financing.
Payday Loans: The Most Expensive Way to Get Cash
When you need no-hassle cash, it comes with high interest rates. They’re called payday loans because if you don’t make your first payment before your next paycheck is due (even if it’s only a few days after taking the loan), they’ll hit you with enormous interest charges.
Unfortunately, the average person who takes out a payday loan isn’t often prepared to repay the money right away. Instead, they leave it unpaid for several months, which racks up interest charges that soon outweigh the original loan amount.
Even though the amount is typically much smaller than a home or auto loan, it’s also extremely difficult for the recipient to pay off.
Payday Loans and Your Credit
Payday loans aren’t the best for your credit. They don’t do much to rebuild credit and can often have the opposite effect. Most of the time, a payday loan officer won’t check your credit report before issuing a loan but gets the money from major credit bureaus such as TransUnion, Equifax, and Experian.
If you don’t pay your loan on time, the credit bureaus (who calculate your credit score) will hear about it and put a permanent and debilitating black mark on your credit report. What’s more, the payday loan office isn’t likely to report on-time payments to the credit bureaus.
In other words, making payments on time can’t be used to repair a damaged credit report.
You Could Get in Legal Trouble
If you don’t repay a payday loan, which becomes ever harder to do as the finance charges increase, you’ll be subject to legal action. You might be taken to court and even placed in debtors prison for failing to repay the loan.
Alternatives to the Payday Loan
As you can see, payday loans come with risky strings attached. Many people can’t afford the high cost of working with a payday loan office.
When you’re in an emergency financial situation, it’s better to rely on some alternative financing solutions. Here are a few:
Personal Installment Loans
As with payday loans, these usually involve a small amount of money, and you don’t need good credit to qualify. Unlike with payday loans, you can arrange a repayment term of several months or years if you want.
These loans can be used for large purchases, consolidation of debt, home renovations, vacation costs, or holiday shopping. The most important difference is that personal installment loans have lower interest rates. Overall, the repercussions are better with a personal loan.
This isn’t an immediate solution, but it can help your financial situation. If you’ve maxed out your credit cards and don’t want to get a personal loan, credit counseling can provide financial respite. You can get help to control your debt and look at options for consolidation and repayment.
The payday loan is designed to help you stretch from paycheck to paycheck. Rather than jump straight to one of those, ask if your employer will offer an advance on your paycheck.
This isn’t a loan, but it can help you address pressing financial obligations. Don’t forget that securing an advance in pay means you won’t be getting a full paycheck on your normal day, so you’ll need to plan your personal finances and duties accordingly.