If you’ve ever felt low on cash and far from the next paycheck You may have thought about getting a payday loan. These short-term cash advances can be figured out based on the earnings you’ll get from your next paycheck. This means that you’re borrowing money from your future earnings rather than an external funding source.
Payday loans are a risky option for those who need them. They have incredible high-interest rates, sometimes as high as 400 percent per year. If you were already living paycheck through your paychecks, it might be a challenge to repay the loan while still covering your expenses for the month, particularly when your income is decreased by the amount you borrowed. But, if you’re among the 40% of Americans who are unable to pay for the unexpected expense of $400 or more, a payday loan may be your only choice.
Payday loans are provided by payday lenders who are specialized or general lenders who offer other financial services. They are easily accessible in brick-and-mortar shops or on the internet. A majority of payday lenders need the borrower to satisfy the following requirements to provide the loan:
- You should have an active checking account
- Provide evidence of the income
- Provide valid identification
- You must be the age 18
The payday lenders aren’t likely to run an extensive credit check or even ask questions to determine whether you’re able to actually repay the loan. The loan is according to the lender’s capability to recover, not on your capacity to pay. As a result, they often create the appearance of a debt trap that’s almost impossible to get out of.
Because the interest rate for payday loans can be extremely high, it’s vital to ensure that you are able to repay the loan promptly.
Let’s say, for example, we take what seems to be a basic $400 payday loan, with two weeks of repayment. The typical cost for each $100 borrowed is $15. In just two weeks, you’ll have to repay the $400 borrowed along with a fee of $60. Based on your financial situation it could be difficult to accomplish. According to the Consumer Financial Protection Bureau (CFPB) states it is the case in those states where they do not restrict or ban the rollover or renewal of loans and rollovers, payday lenders may insist that you pay the cost and extend the loan by two weeks. If you decide to accept and feel that you’re forced to it’s possible to pay the fee of $60 and still be owed $460 when the extension expires. This means you’d have to pay $120 for borrowing $400 for one month.
The CFPB suggests against the use of payday loans rather, recommending taking time to thoroughly evaluate and consider all possible alternatives:
- Renegotiate with your current lenders: If you’re struggling with a significant amount of debt due to credit debt, student loans, or any other source contact your creditors and describe your circumstances. A lot of lenders will help you establish a monthly installment plan which will allow you to earn the money you need every month.
- Request your employer to give you an advance It’s the same basic premise of a payday loan, in that you’re borrowing funds against yourself, but with no possibility of accruing additional interest. The employer could deny an offer, however, it’s still worth considering if you don’t have to pay exorbitant charges and the interest charged by payday lenders.
- Request someone in your family to loan you cash: Asking a loved one for help could be difficult to talk about but it’s definitely worthwhile if you’re able to stay clear of the astronomical cost of the payday loan.
If you choose to apply for an advance loan for payday, you should go into it knowing the potential risks. Ask your lender plenty of questions and make sure you are clear about the terms. Plan a repayment strategy so that you can repay the loan as quickly as possible and avoid being overwhelmed by the additional cost. If you are aware of the risks involved and what you have to do to be able to escape it, you’ll be able to pay off the loan faster and reduce the impact of the astronomical fees and interest rates.