Unforeseen emergencies can happen anytime, and being financially unprepared can put you in a tough spot. Although payday loans offer a quick and easy way to obtain cash, with online lenders offering same-day loans, it’s essential to understand that it involves borrowing cash plus a fee, with the expectation of paying it back on your next payday. While it may seem feasible, it can quickly become a financial burden if you habitually rely on them.
This blog will discuss why you should avoid instant payday loans and explore some reasons to consider before opting for one.
What Is an Instant Payday Loan?
Instant payday loans are unsecured cash advances with high-interest rates and short-term repayment demands, typically given for amounts under $1,000 and used to cover essential expenses. Payday loan operators often operate in low-income areas, lending to customers with poor credit who need help accessing funds. Interest rates can be up to 400% annually, but despite the high risk, default rates are typically low, and many states now regulate the interest rates.
Get Clued in on Instant Payday Loans: Who Uses Them and How They Work
Payday loans are used by low-income minorities who have little access to conventional credit and often use them for recurring expenses such as rent and utilities. Payday lenders target working people who live paycheck to paycheck with high-interest rates and seldom offer workable repayment plans.
The lender usually offers a small amount ranging from $100 to $500, due when you receive your next paycheck. The borrower is asked to make out a postdated check to cover the loan plus fees, and when the due date arrives, borrowers may request an extension, which can add up quickly. Online payday lenders are also available, but they may be risky as they can sell your financial information to lenders or scam artists.
5 Compelling Reasons to Say No to Instant Payday Loans
- There Are More Affordable Alternatives to Instant Payday Loans
What some people aren’t aware of is that resorting to payday lenders is barely a solution to a financial shortfall. There is a better and more affordable alternative to payday loans. Some federal credit unions offer alternative payday loans enabling their members to borrow a small loan cheaper than predatory ones.
Payday alternative loans are considered safe, as credit unions that strive to help their members become financially stable offer them. These loans have lower interest rates, and on-time payments can improve your credit score.
- Quick Payday Loan Is Slippery Slope to Financial Strain
Most borrowers find it difficult to repay the loan in the given two weeks, and they end up borrowing or paying additional fees, increasing their debt burden. Many borrowers take out other loans to pay off the old ones, which compounds the problem. This cycle continues, and the debt keeps growing, and the borrower may end up owing more in fees than the original loan amount.
- Payday Loans Come with High Interest-rates and Costly Fees
Payday loans are expensive due to high-interest rates, which can be over ten times higher than typical high-interest credit cards. Borrowers are charged a fee for every $100 borrowed, usually from $15-$30. It may seem like 15% interest, but the actual annual interest rate is about 390%.
- Dependence on Payday Loans Can Harm Your Credit
In the event of failing to repay the loan within the designated timeframe and are not able to extend it, your postdated check will be deposited. It may bounce, leading to default and debt collection attempts. The process of collecting a debt can have an adverse effect on your credit score, which can make it harder to acquire credit in the future.
- Ruthless Debt Collection Tactics of Payday Lenders
Payday lenders are known to resort to ruthless debt collection practices if you cannot repay the loan on time. You may face a constant barrage of phone calls and emails and even late-night calls from debt collectors.
It is crucial to understand why the loan was needed in the first place and take steps towards finding long-term solutions to financial problems. Avoiding payday loans altogether and seeking other options such as budgeting, borrowing from friends or family, or payday alternative loans may also help break the cycle of debt.