Payday loans seem enticing when you encounter a situation when money is needed immediately; however, there are a number of dangers that should be considered prior to applying for one. Before taking out a payday loan, we urge you to not only read this article, but to do much more research on your own.
What is a Payday Loan?
Simply put, a payday loan is a cash advance given to an individual with the understanding that they will be paying it off with the next paycheck they receive. Payday loans are typically taken out in order to pay off an urgent debt that can't be paid, such as an upcoming rent payment or a sudden medical emergency that isn't fully covered by insurance.
What's the Danger?
The ultimate danger of payday loans is that you can easily become trapped in an endless cycle of taking out loan after loan. Even though the pay period only lasts until your next paycheck, the interest rates that apply to a payday loan are so high that it can become extremely difficult for an individual to pay back the loan with only the money in their next paycheck.
According to the Federal Trade Commission, if you were to borrow $100 for two weeks, "the cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391%. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100."
While all interest rates for payday loans may not reach the extreme of 391%, it is crucial that you research everything you can before making a decision. We urge you to take a look at the Payday Lending State Statues to learn more about the laws in your state regarding payday loans.
How Can You Get out of the Cycle?
If you're already stuck in the payday loan cycle, focus on cutting back on your spending. If you have a crisis budget in place, you already know exactly what your priority expenses are. If not, it's time to cut back on ALL non-essential purchases and bills. While you're working toward paying back your payday loans, you should try and find as many ways to save money wherever you can. A $5 daily coffee on the way to work could end up costing you $25 per week. That's $25 that could be used to pay off your payday loans.
What are Your Options?
If you haven't fallen into the payday loan trap just yet, you're in luck. There are many alternatives that you can try to solve your problems, instead of creating more.
Borrow from a Friend - When you borrow from a family member or friend, you should still pay back the loan in a timely manner, but you aren't threatened by financial ruin if you're late paying them back.
Sell Your Assets- If you have items in your possession that can easily be sold, this might be a better option.
Ask Creditors- If the reason you're looking for a Payday Loan is because of a credit card bill, be honest with your creditors and ask if they can grant you an extension on your due date.
AVOID Payday Loans Entirely- If you have an emergency fund in place, you will be able to draw from it in times of need. By having money earmarked for emergencies in times of financial need, you will never have to put yourself at risk by taking out a payday loan.