Payday loans hold undeniable allure. The cash arrives immediately, without a credit check, and the loans can be repaid as soon as the next payday rolls around. But the ugly truth is that payday loans are traps laying in wait for those who are desperate for cash.
What Exactly are Payday Loans?
Payday loans are small, short-term loans that charge exorbitant rates of interest. Pitched tirelessly on television and radio, these loans target people with poor credit scores and immediate need. They are also known as quick-cash loans, cash advance loans, check advance loans, and deferred deposit check loans.
Repayment is built into the structure of these loans. At borrowing time, the customer writes a post-dated check for the loan amount and fees. When the loan is due, the lender deposits the check. Alternately, the customer authorises a future electronic checking account withdrawal on the loan due date. The loans typically become due within one to four weeks.
Service fees are steep. Because the loans amounts are small, and the weekly fees are between $10.00 and $100.00, the typical interest rate becomes inordinately high: between 400% and 900% of the loan amount. Compounding the matter, if the borrower can’t repay the loan, and instead rolls it over to an additional lending period, the lender again charges fees.
Why You Should Avoid these Loans
A borrower can easily become trapped by an ever-increasing, financial obligation. If the borrower is already in dire financial straits and can’t repay the loan, the fees increase manifold. Countless borrowers have become caught in the cruel cycle of using and extending payday loans. As the fees and interest snowball, the borrower finds the sum impossible to repay.
Furthermore, customers who turn to payday loans usually have poor credit which bars them from using other loan sources. Payday loans exacerbate the problem by further eroding creditworthiness.
Payday loans are short-term solutions that can wreak havoc in the long run. Better alternatives include loans from family and friends, cash advances from a credit card, personal loans from a credit union, and overdraft protection from a checking account. Your employer might also be willing to float a pay advance. It’s far better to use a stable source of credit with easily identifiable fees than to get caught up in the hands of payday lenders.