If you’ve ever been short of cash, especially if you’re always short of cash, you’ve most likely heard of a payday loan, and chances are, the stories you’ve heard weren’t exactly inspiring. But before we tell you why, let’s discuss first what a payday loan is.
A payday loan is just one of the most well-known alternatives to traditional lending, and its popularity, like the others of its kind, stems from the fact that there is no credit check required. This means that anyone who has a job, despite any negative entries in their credit report, can qualify easily for a payday loan. But just because it is easy to obtain, does it mean that it’s worth it?
Not necessarily. There’s a reason why these types of loans are offered almost without any screening, and that is for lenders to make money of course. Here are some of the things you need to know before entering this type of financial agreement.
The interest rates are outrageous. Payday loans possibly have the most horrible APRs, even for someone with bad credit. When the need for cash is urgent, borrowers are quick to accept any deal that is offered to them, no matter what the price to pay. Lenders are well aware of this, and those who cannot secure a loan elsewhere fall easy prey to these payday schemes.
They are not available in installments. If there’s any difference between payday loans and the rest of other bad credit loans, that is the former cannot be repaid in installments. While other subprime loans typically offer the deals for a predetermined, equal number of installments, payday loans do not have the same feature. Rather, you need to pay the loan in full on the agreed date, usually the date when you receive your salary. So is that a good thing or a bad thing? We say both. For one, it can be good because it makes the loan that much faster to get rid of. On the contrary, it can also be bad because you may not have the full amount needed in such a short period, therefore, the first scenario may not be that easy to attain.
Tip: Payday loans may actually be a good alternative for out-of-pocket costs, because paying the loan immediately can make it cheaper than installment loans where interests accumulate daily. But you need to make sure that you’ll actually have the money when the payment time arrives.
It can wound you up in a never-ending debt spiral. In relation to the above, the danger with payday loans is that the amount of time allotted for repayment might just be too short for you. If you fail to pay the full amount of loan, any outstanding balance will roll over on to your next payday, and on to the next, if you still fail to make the full payment. This may force you into taking out a new loan to repay the existing one, and the next thing you know, the new debt you owe have doubled or even tripled the original principal, and there’s no way of getting out.
So the big question is, are payday loans scam? Not exactly, but the dangers they pose certainly outweigh the benefits. We strongly suggest you look for alternatives before settling for this type of credit.
Just like mostly anything in life, there’s always a sense of fulfilment when you’ve worked hard to get something, and a payday loan is no exception. There’s no easy way around getting quick cash, or getting an attractive loan rate, except to start working hard to improve your credit standing.