It’s hard to find yourself in a situation where you need money right now, but you are not alone. According to a study by the Global Financial Literacy Excellence Center at George Washington University, 42% of millennials have used methods like payday loans as a means of managing debt.
So what is a payday loan? The Consumer Financial Protection Bureau defines a payday loan as a short-term, high-interest loan with no credit check that is typically no more than $ 500. Payday loans can be obtained online or through stationary locations. If you don’t have a financial cushion and need quick cash, a payday advance seems like a good solution. But using a payday loan to get rid of debt could be a costly mistake.
Last updated: July 7, 2021
5 Reasons To Avoid Payday Loans
Payday loans can be tempting when you have limited financial resources, but before you sign on the dashed line, consider the dangers of payday loans. Read on to see five disadvantages of payday loans.
1. You create a debt cycle
When your financial resources are nearing exhaustion, obtaining a payday cash advance may help temporarily. But ultimately, all you do is position yourself to sink further into debt.
About 75% of payday loans are given to people who take out 11 or more loans per year, according to the CFPB. Unfortunately, many people are unable to repay their payday loans when they are due, so they pool the borrowed funds into a new loan and create a debt cycle.
2. There are high fees
The APR on credit cards is usually between 12% and 30%. However, the average two-week payday loan has a fee of $ 15 per $ 100 – an APR that is nearly 400% per loan, according to the CFPB.
For example, a short term payday loan of $ 400 could cost you $ 60 in fees. And if you renew the loan often enough, you might end up owing just as much in fees as you originally borrowed.
Just look: 30 Ways To Get Out Of Debt
3. Rollovers allow you to go deeper into debt
When a payday loan comes due and you can’t pay the full amount, some lenders allow you to pay the initial fee only to extend the due date. But then another fee is pinned to the client for the same amount.
For example, if you borrowed $ 200 at a rate of $ 15 per $ 100, you owe $ 230 on your next payday. On your next payday, if you choose to pay the $ 30 fee to extend the loan, the lender will add an additional $ 30 fee and so on. Before you know it, you could be paying almost $ 100 in fees without reducing your principal.
4. You have the potential for repeated debt collection calls
Because these high risk loans are also expensive, you may not be able to repay your loan in a timely manner, which can lead to repeated calls to collection agencies. The Fair Debt Collection Practices Act states that a debt collection company, such as an online payday loan rep, cannot repeatedly contact you with the intent to annoy, abuse, or harass you. In addition, collection agencies should only call between 8 a.m. and 9 p.m.
5. They are not a solution to major financial problems
Payday storefront or online loans are typically capped at $ 500, according to the CFPB. So don’t expect this type of loan to help you get out of debt permanently or to help you with larger expenses such as roof replacement. The national average for a roof replacement is over $ 6,000, according to Fixer.com, a service website for tradespeople.
Alternatives to Payday Loans
With a little research, you can find others possible options to generate quick cash without high fees. Take a look at these alternatives to payday loans.
1. Borrow from a trusted friend or family member
Although it can be awkward, speak humbly to a friend or family member you trust and explain why you need to borrow. Offer to set up a specific, but realistic, written payment plan to show that you intend to repay the loan. Even if the person wants interest on lending you money, it likely won’t be as you would experience with a payday loan.
2. Get a part-time job with immediate payout
Don’t underestimate the income potential of a good side job; Instant payout options are available. Such examples include, but are not limited to:
Lyft or Uber: As an alternative to taxi service, drive your car and receive an instant payout with just $ 50. You may have to pay a 50 cents instant withdrawal fee to receive your money, but it is your money, not money that you need to pay back.
Uber eats: Forget about dealing with passengers and instead deliver food as Part-time job or weekend job. Apply to Uber Eats, a delivery service for people who want food from their favorite restaurant to be delivered straight to their doorstep.
Craigslist Ads: Search gig ads to find jobs that are making money fast. You may find ways to help people pack for removals, driving jobs, cleaning jobs, or babysitting opportunities.
3. Seek credit advice
It can prove beneficial to have a trained professional who knows the ins and outs of debt management. Reach out to a reputable service, like the National Foundation for Credit Counseling, and speak to a credit counselor who can help you create a realistic and personalized budget as part of a debt relief plan.
Find other ways to pay off your debts
Payday loans can be incredibly dangerous to your financial health, especially if you are already struggling with debt. With the expensive fees of payday lenders and the ability to extend the loans more than once, you can easily find yourself in a debt cycle, a target of debt collection efforts, or both.
Take other steps to pay off immediate debts, such as: B. Loans from a friend or family member, or a part-time job with a quick payout. Then consider reaching out to a credit advisor who can help you work your way out of debt permanently.
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