Seventy percent of payday loan users borrow the money for recurring expenses, according to LendEDU. In addition, the annual percentage rate (APR) on a $300 payday loan can be as high as 664%.
The average borrower typically doles out $520 in interest and fees just to borrow $375. Even if you aren’t great with math, it’s easy to see that something doesn’t pass the smell test. The fact is, there are many reasons to avoid payday loans like the plague.
Astronomical renewal fees
If you find you can’t repay one of these loans you will likely need to either renew it or get another one. Here’s an example of how this works. Let’s say that you borrow $400 with a $60 interest payment and are then required to renew the loan for four months. This means your interest will total $480 but you will still owe the original $400. That makes zero sense.
What happens if you don’t pay
The second biggest reason to avoid payday loans is the consequences if you don’t pay. You will likely give the lender the right to collect the debt by taking money out of your checking account. But if you lack the funds to cover it, you could find yourself in big trouble.
In addition to getting socked with a very big bank fee, the lender could go to great lengths to collect their money. They may even sell your debt to a debt collector who will hassle you unmercifully until you repay it.
The number one reason to avoid payday loans
Finally, you can’t pay off a payday loan gradually. At the end of two to four weeks, you are required to pay off the entire sum including principal and interest. The problem is that most borrowers can’t come up with this amount of money, so they just renew their loan or take out a new one. This is called the cycle of debt because you keep owing more and more money in interest and fees.
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Avoid getting caught up in the cycle of debt. Here are six better options to avoid payday loans:
Make a budget
The problem with payday loans is that you’re treating the symptom and not the cause. Most people take out payday loans to cover their day-to-day expenses because they’re living beyond their means.
You could avoid this by having a household budget. This means taking a hard look at all your expenses and then figuring out what you can really afford to spend on each of them. You would then need to find ways to trim those expenses so that you spend less than you earn.
Seek emergency assistance
If you cut your spending to the bone and still find that you can’t make ends meet, there are ways to get help. Many community organizations and churches will provide assistance with utility bills, food, rent, and other emergency needs. Some also offer loans in small amounts at very low interest rates.
It is also possible to obtain housing assistance. If yours is a low-income household, you could probably take advantage of subsidized housing or vouchers that would cover a portion of your rent.
Obamacare includes subsidies to pay for health insurance based on your household earnings. If your income is low enough, you could also be eligible for free health coverage through Medicaid.
If you have an especially low income, you would likely be eligible for food aid through the Supplemental Nutrition Assistance Program—formerly known as food stamps.
Pay your bills late
A payday loan can look like a good bridge if you have a bunch of bills due for payment on Monday. But what if your next paycheck isn’t deposited until Friday? In this case, you would be better off paying those bills after their due date rather than taking out a payday loan. You may have to pay a late fee but not in all cases. In any event, it will cost less than a payday loan.
For example, many utility companies will accept late payments without charging a fee. But even if you are charged a fee, it will probably be much less than the interest you would pay on a payday loan.
If you were late on your rent, you might be charged a fee as high as 5%. This means if your rent was $600 a month it would be $30. Still, that is much less than the cost of a payday loan. And some landlords don’t start charging a fee until you’re 5 to 10 days late.
You could call ahead of time to give them a heads-up and possibly circumvent any additional cost. And most banks will not charge you a late fee on a car payment until you’re 10 days overdue.
Deal with your debts
Believe it or not, you can negotiate with your lenders instead of just putting off your bills. For example, you could ask to get your interest rate reduced, which would mean a lower payment.
You might also get one or more of your lenders to accept lump sum payments for part of what you owe. They could then forgive the rest of the balance. Or they might be willing to work out a plan where you make your repayments a little at a time. This would free up money you could use to pay for other expenses that are more pressing such as your utilities.
Pawn or sell stuff
Do you have some high-value items just sitting around on a shelf or in a closet collecting dust? This would include collectibles, musical instruments, jewelry, and new or old electronics. If you do have some of these items, you could sell them on eBay or Craigslist.
You could even take them to a pawn shop. But they will charge a fee and require you to reclaim the item in one to four months. If you fail to do so, the shop will keep it and sell it to someone else to collect their money.
Get your paycheck early or request a paycheck advance
Finally, ask your company’s HR department if it would be possible to get your paycheck a little early or if you could get an advance on your pay.
A better option would be to get your check early. The problem with an advance is that your next paycheck will be short so you will have less money available to pay your bills and you could easily slip into that circle of debt.
Frequently Asked Questions About Payday Loans
Q. Which payday loans require a credit check?
Very few payday lenders require a credit check. The reason is that payday loans are typically for small amounts such as $200 or $300. It’s simply not worth what it costs for a payday lender to check your credit.
Q. Which payday loans are the best?
One review site ranks the best online lender as 100DayLoans since the site is very easy to use. They rank the second payday lender as NetLoanUSA. Lenders with local locations that are considered among the best are Check ‘n Go and Check Into Cash, which has about 1000 stores nationwide.
Q. Which payday loans are considered the safest?
Safe online lenders include the aforementioned 100DayLoans.com and NetLoanUSA.com, as well as 247Loan.com and LendUp.com. Safe payday lenders with local offices include Speedy Cash, Cash Central, and Pay Day One. Beyond this, if you are considering a local payday lender be sure to check them out with the Better Business Bureau.
Q. What payday loans are good?
Essentially, no payday loans are good. They are basically designed to trap you in a never-ending cycle of debt. If you have a pressing bill such as your rent or utilities, you might use a payday loan to cover it. But if you do it’s critical that you can pay off your balance and interest after the two weeks. If you choose to renew the loan or get a new one, you are only asking for trouble.
Q. What payday loans could I be eligible for?
To be eligible for a payday loan, you generally must be at least 18 years of age, have valid identification, an active checking account, and provide some proof of income. If you meet all these requirements, you may be able to get your money in as little as 15 minutes. The amount of money you will be eligible for will vary depending on your income and the payday lender.