For many consumers who don’t have good credit and don’t have a savings account to fall back on, payday loans are a way to get quick cash. In an emergency such as a car breakdown, medical expenses, or an inability to make a rent or mortgage payment, payday loans may save the day. So why do payday loans get a bad rap?
How Do Payday Loans Work?
Payday loans are small cash advances that are usually less than $1,000. If you’re in a sudden financial bind, these loans can be convenient since there’s rarely a credit check. Typically, you can be approved for a payday loan if you walk into a store that offers these loans holding a paycheck stub, a checkbook, and proof of your identity.
The problem is that the entire loan plus interest has to be paid in full out of your next paycheck and the interest rate charged is much higher than the rate on credit cards or on personal loans. The APR on a payday loan is often 300% or higher. Payday lenders may refer to fees rather than the interest rate, such as a fee of $10 to $15 for every $100 borrowed. With a fee of $10 per $100 borrowed, if you borrow $500, you owe $550 on your next paycheck, which is a pretty expensive loan.
A Dangerous Borrowing Cycle
Payday lending is frequently predatory. This means that the lenders deliberately target people who have limited income and are facing financial challenges. While it’s meant to be a short-term solution, many people who turn to a payday loan end up trapped in a vicious cycle of repetitive borrowing. When their payday comes, they may need every penny to cover ordinary expenses, and so they have to roll over the payday loan, incurring still more cost.
Alternatives to Payday Loans
While a payday loan might help you pay for an unplanned expense, it’s a good idea to consider alternatives. If you have a credit card with available credit, a cash advance against the card will be cheaper than a payday loan. In addition, some lenders offer more conventional loans to borrowers with bad credit. The high interest rates on these bad credit loans is usually much lower than the rates on payday loans.
Protecting Your Credit
One of the benefits of having good credit is being able to borrow money in an emergency without paying a lot of fees or extremely high-interest rates. Work on improving your credit by paying all your bills on time and avoid borrowing money you don’t need.
When working to improve your credit, make sure there are not any errors on your credit report. Dovly is an automated credit repair engine that can help you remove credit report errors. Contact Dovly today to try it risk-free with our free membership tier.