Payday loans can save your life when you need money quickly, but high-interest rates and short payment terms can lead to a cycle of debt.
A payday loan is a short term loan for a small amount, usually $ 500 or less, which generally expires on the next payday with interest rates.
These loans can be marketed to bridge the gap between paychecks or to create unexpected costs. However, the Financial Consumer Protection Agency says that payday loans can become “debt traps”.Here’s why: many borrowers can’t pay the loan and fees, so they end up paying even more fees to delay the loan, “extend”, or refinance the debt until they end up paying more. interest rate pays as the amount they pay you borrowed first.
How Payday Loans Work
Payday loans can have different names: prepayment loans, delayed deposit loans, advance check loans or subsequent check loans, however, generally work the same way.
To apply for a payday loan, you may need to issue a check with a later date which extends the total amount of the lender plus the fees. Or you can authorize the lender to debit your bank account electronically. The lender usually gives you the money.
The loan usually expires on the next payday, usually in two or four weeks. If you don’t pay the loan plus fees before the due date, the lender can cash your check or debit your account electronically.
Many states that allow such loans set a limit on the loan amount and the corresponding interest rates. Depending on the state, businesses can charge $ 10 to $ 30 for every $ 100 borrowed.
Payday Loan Alternatives
Although a payday loan seems like a quick fix, there are other options that can help you stay out of a debt cycle. Alternatives include:
1.credit union credit
If you are a member of a credit union, you can access personal loans at lower interest rates. Federal credit unions can also offer “alternative payday loans” to members for amounts between $ 200 and $ 1,000. They generally have a maximum term of six months, filing fees not exceeding $ 20 and an annual interest rate not exceeding 28%.
2.preliminary examination
In some states, your employer can advance your paycheck at no additional cost. This may depend on the discretion of your company. Therefore, ask your manager or the HR contact person about your options.
3.Debt payment
A debt agreement can affect your balance, but it can help you settle your debt and start over.
4.Personal emergency loan
These can also have high-interest rates, but if you need a loan and you don’t qualify for lower interest rates, it is important to make comparative purchases. You may benefit from a slightly better price and longer terms than those offered by the company’s payday lender and you don’t know it.
You should seek credit from a lender who reports to the major credit bureaus. A positive history of one-time loan payments can help you accumulate loans so that you can ultimately qualify for loans with better interest rates.
