Imagine you are a recent college graduate who just found a job. Being new to the workforce, you haven’t hit your desired salary yet. Still, you are proud to be on your own and finally not dependent on your parents for financial support.
Then it happens
Everything seems to be going smoothly until your car suddenly won’t start. Let’s say it costs $120 just to tow it to a garage for repairs and another $300 to replace the battery (this amount may vary depending on your car).
Since you don’t have an emergency fund, you consider potential options. You ask yourself, “Is getting a payday loan a good idea or not?”
How payday loans work
The way a payday loan works is rather simple. There are usually no credit requirements if you decide to get one. All you typically need to do to be at least 18 years of age, show a source of income, a checking account, and valid identification.
You would then usually write the payday loan company a check for the amount you need to borrow, plus the company’s fee. The check would be dated to coincide with your next payday. Sounds like a plan, right? But is it a good one?
Sure, you could receive the $420 in cash you need to get your car fixed immediately. When the next payday rolls around, the company will cash your check and get its money back along with its fee. But, what if the check bounces due to a lack of funds?
Usually borrow only what you know you can pay back
The number one rule of payday cash loans is to never borrow more than you can afford to repay. If you are unable to meet your obligation within the due date, your debt will continue to accumulate at an alarming rate.
If you can use your paycheck to cover the loan, you might have to find another way to pay for living expenses. Now it has become a challenging situation all the way around.
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What happens if there is not enough money in your account?
Suppose your checking account lacks the funds to cover the check when your next payday hits. If this is the case, the company will most likely extend the loan and charge you an additional high fee.
The cost of a payday loan
The amount of money a payday loan company charges may not seem like a lot. But you might be shocked when you think about it in terms of its APR or annual percentage rate.
Payday loan companies typically charge $10 to $30 every two weeks for each $100 they advance you. For example, a typical two-week payday loan with a $15 per $100 fee would have an APR of almost 400%!
The dangers of a payday loan
One of the biggest dangers of a payday loan is what can happen if you lack the funds, and it continues rolling over. This could cost you thousands of dollars a year in fees.
And if you allow the payday loan company to access your checking account, you could be opening yourself up to a financially devastating situation.
If you don’t pay back the loan
It is important to keep in mind that no matter what they call it, a payday loan is still a loan. This means that if you fail to pay it back, the loan company could do what any bank or credit card company might do—turn your debt over to a collection agency. Things could get ugly if the loan company or the collection agency ends up filing a suit against you.
Consider alternatives
If you need cash in a hurry, there are better alternatives to a payday loan. For example, you could ask your employer for more hours if you are an hourly worker. You might also ask for a cash advance on your next paycheck, which would mean paying no “fees” or interest. You might also have items sitting around the house you could sell online to get you through the emergency.
Debt settlement can help you get back on track if you are struggling to pay your bills, including a payday loan. You could resolve your debt in as little as 24-48 months. Our debt specialists will also show you the ins and outs of saving and spending money.
