You may have contemplated a payday loan if you’ve ever been short on cash and far from your next paycheck. These short-term loans are predicated on the amount of money you’ll get from your next paycheck. In other words, rather than using a third-party funding source, you’re borrowing against your own future earnings try Bridge.
Borrowers should avoid payday loans since they are hazardous. They offer astronomically high-interest ratesâup to 400 percent annually. If you were already living paycheck to paycheck, repaying the debt while still covering your monthly costs could be incredibly challenging, especially if your income decreased by the amount you borrowed. On the other hand, a payday loan may feel like your only alternative if you’re one of the 40% of Americans who can’t afford a $400 unexpected bill.
What are the requirements for a payday loan?
Payday loans come from either specialized payday lenders or more general lenders who offer various financial services. You can simply find them in stores or on the internet. To provide you a loan, most payday lenders only require that you meet the following requirements:
- Have a current checking account
- Be at least 18 years old
- Provide proper identification
- Show evidence of income
Payday lenders rarely conduct a comprehensive credit check or ask questions to assess whether or not you can repay the loan. Because loans are arranged primarily on the lender’s capacity to collect rather than your ability to pay, they can easily ensnare you in a debt trap that is nearly impossible to escape.
What are the interest rates for payday loans?
Because payday loans have such high-interest rates, it’s critical to be sure you’ll be able to repay the bill on time. For example, let’s look at a seemingly straightforward $400 payday loan with a two-week repayment period. For every $100 lent, the average cost is $15. So you’d have to repay the $400 you borrowed plus a $60 fee in just two weeks. That may be tough, depending on your financial situation.Â
According to the Consumer Financial Protection Bureau (CFPB), in jurisdictions where loan renewals or rollovers are not prohibited or limited, the payday lender may push you to pay only the fee and prolong the loan for another two weeks. If you accept â or feel compelled to â you’ll pay the $60 fee but still owe $460 at the end of the extension. That means you’ll have to pay $120 to borrow $400 for a month.
Alternatives for a payday loan
Request a loan from a friend or family member:
It may be uncomfortable to ask a loved one for assistance, but it will be well worth it if you can avoid the excessive interest that comes with a payday loan.
Request an advance from your employer:
This works on the same concept as a payday loan in that you’re borrowing money from yourself but without the risk of accruing additional interest. Your company may deny your request, but it’s worth a shot if it means you can avoid paying payday lenders hefty fees and interest.
Re-negotiate with your present lenders:
If you’re in serious debt, whether it’s through credit cards, student loans, or something else, contact your creditors and explain your circumstances. Many lenders are prepared to work with you to set up a monthly payment plan that will allow you to save money each month.
If you decide to take out a payday loan, make sure you understand the hazards. Ask a lot of questions of your lender and make sure you understand the terms. Make a repayment strategy so you can pay off the loan quickly and avoid feeling overwhelmed by the additional cost. You’ll pay off your debt faster and reduce the burden of high-interest rates and fees if you know what you’re entering into and what you need to do to get out of it.