When unexpected expenses come out of the blue and you’re not sure how best to pay, you may be tempted to take out a payday loan to get a hold of the money straight away and get the payment wrapped up. Here at Money Crashers, we are strongly against payday loans. If you’re not familiar with how they work, the basic idea is that you are temporarily loaned the money until your next payday. In most cases, you apply for the loan and are approved very quickly (often within one or two hours), and the money can usually be deposited into your bank account that same day. Sounds good, right? Think again. There are some pretty big downsides to payday loans that make them a very risky and unattractive prospect. Here are some of the reasons why we’re so set against payday loans:
The interest is almost criminal. Payday loans may well be a convenient way to get your hands on cash in an emergency, but you really pay the price for this. The interest on payday loans is exceptionally high and this isn’t always made obvious when you initially take out the loan. Because of this, it can come as a big shock that hasn’t been budgeted for. After all, the reason that payday loans are taken out in the first place is because the recipient is short of money, so having big interest on top of the basic loan can be a devastating blow in terms of being able to repay the money.
Typically, you’re charged something in the region of $15-$25 for every $100 that you borrow. For a $500 payday loan, you’re effectively charged as much as $125 just to borrow the money for a month or less. The loan balance can be carried over to another month but in the meantime, the debt is racking up a lot of interest that increases the balance even further. The amount that you ultimately owe can potentially double if you can’t pay the money back in full at the first time of asking. If you have to continuously “roll over” to another month, you could find that the interest becomes more than the original loan.
The loan period is short. To avoid getting into deep trouble, a payday loan needs to be repaid by your next payday. For most payday loans, you have a maximum time period of around 30 days (sometimes less) before you’re deemed to have “missed” the first repayment. At this point, you’re hit with big interest charges that significantly ramp up the amount that you owe. On top of this, there may also be fees for “rolling over” the loan to another month.
Even if the situation is an absolute emergency, there are other alternatives to payday loans. For example, ask your bank for an authorized overdraft, charge the unexpected expense(s) to a credit card, look to online peer-to-peer lenders such as Lending Club, or simply scrounge up some money by doing odd jobs for neighbors or selling a bunch of stuff. Whatever the problem, payday loans are not the best solution and can cause even bigger worries in the future.
As you can see from this post, I’m no fan of payday loans. For me, they’re little more than a good way for loan companies to rip off vulnerable people who are in financial trouble. Taking out a payday loan might seem like a good way to pay something off in full so that you’re not incurring interest but in reality, the interest on payday loans will blow this out of the water. Once you get into trouble with a payday loan, it can be difficult to get out of the mess. If you do go ahead and take out a payday loan, be sure that you’ll have the means to meet the repayment without having to get another loan to cover your back. We know the the other side of this argument that payday loans serve to help those people with bad credit or people in dire financial situation, but it’s simply predatory lending. They prey on the weak to make and capitalize off of that TREMENDOUSLY. Our stance is that they should be avoided at all costs, and there are plenty of other options available.
What are your thoughts on payday loans? Have you ever taken one out, or would you do so in the future?
(photo credit: taberandrew)