As your last resort, payday loans can help you get out unscathed from financial pitfalls and can give you the peace of mind needed until your next paycheck comes through. But, if handled incorrectly, payday loans can also be a financial quicksand: they are very easy to access but cause a difficult debt to get out of.
That is why, before choosing this option, you should be well aware of what you are getting yourself into – and how to deal with the consequences.
In this guide, you’ll learn about the benefits that have caused these loans to skyrocket in popularity, their drawbacks, and, more importantly, valid alternatives to consider.
Payday Loans Have Never Been More Popular: Here’s Why!
To understand the pros and cons of payday loans, it is important to be clear about what they are and who they are for. So, let’s start with a quick-start guide to payday loans.
Payday loans are loans created with the idea of helping users afford their expenses until their next check comes through. In turn, lenders require applicants to have regular employment and request that loans are paid back within a short timeframe, usually two weeks.
Although these loans come with a very short approval period, they only allow users to borrow up to $1000, with interest rates as high as 15-20%. What’s more, many lenders require borrowers to set up a predated check to ensure that the funds are returned within the agreed date.
They Are the Fastest Types of Loans Available
The main appeal of payday loans is the fact that users can get approved within hours and with minimal background checks.
This factor makes them a great option for households living paycheck-to-paycheck or for individuals who have just experienced a financial setback. Generally, they are used to cover expenses until the next payday.
They Help Households Cope With the Raging Inflation
According to surveys by the World Economic Forum, as inflation reaches its highest levels in over 40 years, millions of American households are now facing significant financial hardships.
In this climate, cash advances have played a crucial role in helping families and individuals support themselves and dependent household members, thus fuelling the popularity of payday loans.
Payday Loans Are Often Available Even With Poor Credit
Payday loans and unsecured personal loans for consumers can help those with bad credit or a limited credit history access funds without having to meet strict eligibility requirements.
Indeed, generally, borrowers looking to take out a payday loan don’t need to provide personal details or credit scores and get approved within hours of submitting their application.
Users Can Obtain a Payday Loan Online
Last but not least, payday loans can be obtained through an online application, thus maintaining the borrower’s privacy.
For many families and individuals facing economic hardships, the convenience of accessing a loan online or from the privacy of their homes might be an irreplaceable advantage.
Drawbacks of Payday Loans
While payday loans might be incredibly appealing for consumers struggling to get to their next paycheck, cash advancements are not free of risks or drawbacks.
Before choosing this option, be sure to understand what to expect:
- High associated costs – APR rates for payday loans average at nearly 400%, which is much higher than the 28-36% APR charged by credit cards.
- High fees – Payday loans are designed to be repaid within two weeks. If you are unable to do so, you might need to pay another round of fees.
- Automated attempts to withdraw money – Many lenders will request access to your bank account details, and attempt to withdraw funds once your repayment period has ended. If you don’t yet have the money, you might face several overdraft charges.
- Contracts might not be in your favor – Most payday loan contracts don’t contain a right of rescission, meaning that you won’t be able to change your mind once you have signed up for it.
- Questionable debt collection practices – consumers who are unable to repay their debt might face significant pressure from debt collectors and become victims to practices such as late-night phone calls.
Valid Alternatives to Payday Loans
Many users with poor credit resort to payday loans because they believe that this is the only alternative for them to borrow money. However, you should be aware that there are some other alternatives worth considering.
These include:
- Joining a credit union or asking a small local lender can give you access to more lenient eligibility requirements and a more personal touch.
- Compare APRs offered by different lenders, including alternative lenders and credit card providers.
- Consider credit card cash advances or borrowing against your credit card to access cash.
- Ask your employer for a salary advance.
- Ask your family and friends for financial help, or tap into your savings.
- Consider tapping into your account’s overdraft – you might even be able to do so without running into high interest.
- Check whether you qualify for local financial welfare assistance programs.
Once you have a solution to your impending issue, make sure to start looking at your financial future and make a plan. Create a budget to start repaying your creditors and devise a strategy to pay off your high-interest loans first.
Pro tip – If you have already signed up for a payday loan, consider activating your card’s overdraft protection feature to avoid running into unexpected fees.
Talk to a Credit Counselor Before Deciding
If the services of a financial advisor are out of budget at the moment, consider seeking the help of a credit counselor. Credit counseling agencies often operate on a non-profit basis, thus giving you access to specialized professionals who can help you understand how to efficiently rebuild your finances.
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