If you need funds fast, payday loans can help you to get the money you need quickly and without the need for a credit check. Often all that is required is an ID, proof of income and a bank account before approval can be granted, making it an attractive option for those with bad credit.
However, while many people turn to payday loans (opens in new tab) to help them make ends meet or pay an unexpected bill, these short-term loans have a reputation for extortionate interest rates and charges. So, before agreeing to a payday loan, it’s important to consider your options carefully.
What’s the problem with payday loans?
The most obvious concern with payday loans is their excessively high rates of interest – the Consumer Financial Protection Bureau found (opens in new tab) that a two-week loan of $100 can cost $15, which equates to an annual percentage rate of almost 400%.
For many cash-strapped consumers, $15 for a $100 loan might not seem a huge sum – but remember that this is the interest charged for two weeks only. For those unable to pay back the loan within the initial timeframe – and many cannot – the cost of the debt can rapidly escalate.
It’s due to these risks that payday loans are prohibited in some US states. Court proceedings are also under way to reintroduce tougher rules (opens in new tab) that force payday loan companies to seek proof from customers that they can afford to pay back the amount they wish to borrow before a loan is finalised.
What happens if you can’t repay your payday loan?
When permitted by state law, some lenders will offer to roll over the debt into another loan, giving you another two weeks to repay the amount borrowed. However, if the loan is not repaid within that time, the second loan may be rolled over into a third, the third could be rolled over into a fourth, and so on. Each time this happens, additional fees and interest are charged on top, increasing the overall cost of the loan and starting a cycle of debt that can quickly become difficult to escape.
Alternatively, the lender could break the payments down into smaller chunks, but again, further fees and charges will usually be added which can make it harder to get back on track. Ultimately the result of either option is that considerably more is paid out than was initially borrowed.
Another important consideration is that the lender will have access to your bank account, allowing them to make automatic withdrawals from your bank to recoup their money. This can lead to overdraft fees or insufficient fund fees, and each time this happens you’ll be pushed further into debt which will also affect your credit.
In extreme cases, the loan could be sold to a collection agency and court judgments will then typically follow. All of this means that if you are having problems meeting your repayments, it’s vital that you contact your lender as soon as possible to see whether you can work out a payment plan or alternative arrangement.
Should you get a payday loan?
Payday loans require careful consideration no matter what your circumstances. However, if you’re struggling to make ends meet or you need some extra cash in an emergency situation, a payday loan could prove a valid solution – but only after all the better alternatives to getting a payday loan (opens in new tab) have been exhausted.
If you decide a payday loan could work for you, it is crucial that you take steps to manage your loan effectively and are confident that you are able to meet the repayments within the time agreed. This will also ensure the loan does not affect your credit score (opens in new tab). Additionally, you should always look for a payday lender that is able to meet your specific needs and offers the most suitable loan on the best terms.
What are the alternatives to a payday loan?
For those looking for quick access to funds, the best personal loans online (opens in new tab) is a good place to start. Funds can often be in your account within just a day and you’ll have the option to repay the amount borrowed over a number of years, rather than just a matter of days or weeks. Personal loans are far less risky and less expensive than payday loans and can help fund a large purchase as well as consolidate debt.
If you are able to wait a little longer for your funds, another option is a credit card, particularly if you can find a card that offers a 0% introductory APR on purchases. Some of the best credit cards (opens in new tab) offer interest free terms of up to 18 months and, providing you make at least the minimum repayment each month and pay off your balance before the 0% APR deal ends, using this type of credit card can be a cheap way to borrow.
Keep in mind that the best personal loans and credit cards are typically only offered to those with good credit, so if your credit score is poor you may be offered less favorable interest rates or terms. However, by using the best credit repair services (opens in new tab) you will be able to boost your credit score and improve your chances of getting accepted for finance.
Finally, if you’re looking for a solution for debt problems you already have, payday loans should be avoided as they are only likely to make the situation worse. Instead, seek advice from the best debt consolidation companies (opens in new tab) and debt settlement companies (opens in new tab) to see how they can help you.