You will never hear payday loans in any financial advice that you will receive. Nobody will tell you that the only way you can get out of a financial problem is to get this type of loan. In fact, in the eyes of a lot of people, this is a huge taboo.
Also known as a short term loan, this is a type of loan that only the most desperate of individuals will take on. It usually involves really high annual interest rates – usually between 391% to 521%. It involves a small amount of money but the interest that you will be required to pay in two weeks if converted into an annual interest rate is quite high. Not only that, people expect that they will be using more than one payday loan before they can really get out of their current financial problem.
If you think about the characteristics of this type of loan, you will really wonder why people would choose to put themselves in this financial position. When you borrow from payday lenders, you will really be placed in a compromising situation. What you will be looking at is a quick fix to your problem that will involve a lot more money and stress.
Despite the seemingly unfair practices and the obvious losses that the borrower will take on, there are still consumers who consider payday loans to help them out of tight spots. It is still a legal industry after all. In fact, it is a $46 billion industry that is not as regulated by the government as the other types of loan. This is actually surprising because of the possible damages that it can bring to the finances of the borrowers.
Survey reveals some Americans see short-term loans positively
You would really think that after understanding these facts about payday loans, people should stay away from them in the same way that they should never go near loan sharks. But that is not the case. According to the study published on PewTrusts.org, 9% of their respondents feel positive towards payday loans. That means it is viewed as a solution of some sorts – and not something that you should avoid like a plague.
When compared to other financial institutions, payday lenders are lagging behind when it comes to positivity. Credit Unions lead at 62% while banks stay in second at 50%. Payday lenders are way behind at 9%, but that is where it raises a lot of questions. Is this 9% that desperate for money that they willingly put themselves under the stress of borrowing payday loans?
The answer is yes.
According to another article published on Forbes.com, people borrow from payday lenders because even with the high-interest rate and prices – they are still better than the financial situation that they are in. It is indicated that these people usually do not have a choice when they take out these loans.
By understanding what payday loans are, you can actually profile the people who usually borrow them.
They are short on cash. This is obvious. You will not borrow money if you have cash on hand. These are the people who are worse than those living from paycheck to paycheck. The people who borrow short term loans are those who just want to make ends meet until the next paycheck comes in.
They have a low-paying job. It is hard to borrow from anyone if you do not have a job. How can you prove that you can pay them back? One of the few requirements that you need to show is a pay stub or statement that will prove you are employed. The idea is to provide payday lenders with evidence that you are expecting money on your next payday. But since you are opting for payday loans, it can also be assumed that your job is a low paying one. Otherwise, you will probably not be using this type of loan to get you out of a tight financial situation. Some claim that there are payday lenders who do not check the employment history. This may be true, but they do require the borrower to write a check to cover the loan amount plus fees. In case the borrower cannot pay back the loan on time, the lender will cash in the check. If it is not funded, then that would lead to more problems for the borrower.
They live in low-income communities. Most payday lending establishments can be found in low-income neighborhoods. This is probably because their usual clients are those with low-paying jobs that can only afford to rent a house in these communities.
They cannot borrow from banks or credit unions. The attraction of these short-term loans is the lack of credit checks. The usual borrowers are those with no credit history that will allow them to get a normal loan. In fact, payday lenders are known to skip the credit checks. This is why this is a great option for those who are in a bad financial situation.
They are in a serious financial crisis. The last assumption that you can make about these payday loan borrowers is that they are in an extremely bad financial situation that they do not mind paying a huge interest on the loan as long as it can help them survive until the next paycheck.
If you think about it, people should be afraid of the effects of these payday loans on their finances. But according to an article also published on Forbes.com, payday lenders provide some consumers with access to an economy where they are normally shut out. This is probably referring to the fact that most of the payday borrowers do not have access to the usual financial products offered by banks and other financial institutions. The article even mentions that more than 12 million Americans borrow from these lenders. More disturbing than that is the fact that these people know that when they borrow money from payday lenders, they have to roll over payday loans before they can really be debt free. They still borrow despite this fact. The article even likens it to refinancing but with a much higher interest rate.
How to get out of a payday loan cycle
If people are intent on using payday loans to get them out of a difficult financial problem, they need to come up with a plan that will help them get out of it. Not being able to pay this loan within the specified time will keep you from really taking your finances to the next level.
If there is one cycle that you have to break, it is the payday loan debt cycle. When you have multiple payday loans, that is the fastest way that you can totally ruin your finances. To get out of this vicious cycle of borrowing, you obviously have to get the money that will allow you to pay off this payday loan. If you got this loan because your paycheck was not enough, then you obviously cannot rely on your existing source of income. That means you should earn extra. Here are some tips that will help you do that.
- Sell what you do not need. Start by looking at your possessions. See what items you can dispose of and sell them. The profit will go to your payment fund for the payday loan. Another benefit of this is you can declutter your home in the process.
- Cut down spending. We mean really cut it down to the bare necessities. If you can sacrifice for a couple of weeks – walk to your work instead of riding. At least, if it is physically possible to walk to your work. The exercise will do you good. If you smoke, you can probably get rid of the habit for a while because what you spend on your cigarettes can be added to your payday loan payments. Anything that you can cut back on – you should stop spending and save it for your payday loans.
- Get a second job. This is something that may be a little difficult to do. After all, juggling two jobs is not an easy task. It can be tiring and it can take away time that you have for your family. Not only that, it is difficult to get a good paying job. Most likely, what you will get is a low paying job.
- Set up a passive income. Again, this is also a bit challenging. Most of the time, this requires a capital. One of the things that you can do is to put something that you own up for lease. For instance, if you have an extra room in the house, you can probably get a roommate. Your expenses at home will decrease if someone will help you pay for it. Any amount freed from your budget is something that you can use to pay off your payday loans.
- Start an online career. If you have a laptop or computer and a stable Internet connection, you can start an online job. Use a talent that you have. If you can write, then look for clients who are in need of articles. You can do online consultations too. Graphic designing, web development, and programming – these can help you earn extra.
Some people think that borrowers of payday loans are addicted to borrowing. However, there are financial situations wherein they are forced to roll over the debt so they can make ends meet. With a few sacrifices and determination, you should be able to get out of this debt cycle.