Everything you need to know about payday loans
For the millions of Americans who live paycheck to paycheck, running out of money is a constant and imminent concern. About 12 million people take out short-term unsecured loans – sometimes called payday loans – each year, according to the Federal Reserve Bank of Saint-Louis. And while these loans can help them survive until they get their next paycheck, they also charge a hefty toll. Yet with millions of Americans Due to Covid-19 pandemic, many will continue to depend on this dangerous financial tool.
If you do not have a strong credit history, it can be difficult to get a traditional loan or a credit card. But there are many lenders who will allow you to borrow without a credit check, with a few questions asked. The terms will be onerous, however, and they will certainly end up costing you a lot more than what you borrowed. With a deserved reputation for “predatory loans,” payday lenders have driven many borrowers into a spiral of debt and regret.
If you are strapped for cash, you are not alone. But before you take out a payday loan, let’s take a look at what they are, why you should avoid them – and who you can borrow money from instead.
What is a payday loan?
A payday loan is a short term unsecured loan that usually comes with a high interest rate. Most payday loans are for small amounts – usually $ 500 or less.
With a traditional loan, you get a lump sum, then you start making repayments over a fixed term – anywhere from a few months to a few years – with a “reasonable” interest rate added. With a payday loan, the full amount is due at one time, including interest and fees. In most cases, you need to write a post-dated check for the full amount owed – the loan, plus interest and fees – or authorize your lender to debit the money from your bank account on that date.
The interest rates of payday loans are much higher than those of traditional loans. A standard APR for a personal loan ranges from 6% to 36% – but lenders offering payday loans may charge annual rates of 100% or more, and some have been found to exceed 1000% depending on a 2013 ProPublica survey. That said, some states have limits on interest and fees – and in some states, payday loans are banned completely.
It should also be noted that payday lenders tend to target people who live in areas with high poverty rates and low income levels – as well as minorities and economically disadvantaged groups, who may traditionally have more difficulty in qualifying for conventional loans, according to a study by the Saint-Louis Fed.
Why You Should Avoid Payday Loans
There is twice as many payday lenders than McDonald’s restaurants in the United States – and borrowing money from any of them is about as easy as ordering a burger and fries. Getting approved is relatively easy – many payday lenders won’t even do it. , therefore a tarnished credit history will not be a factor.
This is a benefit for people with poor or limited credit history. But high interest rates and strict repayment terms force many people to fall into the payday loan trap where they are forced to take out new loans just to pay off existing loans.
If you don’t have enough cash to pay off your loan when it is due, the lender can automatically trigger a withdrawal from your bank account. And if you don’t have enough money in your bank account to cover the costs, you could face an additional hit from an “insufficient funds” penalty. You may also be subject to penalties from the lender if they do not receive your money on time.
If your state allows payday lenders, you might see them in some parts of your city and not in others. For example, there may be more of them where poverty rates are high and income levels are low. These types of lenders tend to target minority groups as well as those with very low credit scores who do not otherwise qualify for traditional loans.
Payday loan alternatives
If you are in dire need of cash to cover basic expenses, buy food, or pay off high-interest debt, there are other options to consider. Here are just a few:
There are many personal loans available online at more reasonable interest rates. Even if you have less than stellar credit, some lenders may look beyond your credit score when assessing eligibility.
- OneMain Financial has no minimum credit score requirement and you can borrow as little as $ 1,500, depending on where you live. APRs range from 18% to 35.99% and terms are two to five years. They also have a prequalification option to see if you are eligible without applying first.
- Loans before start around $ 2000 and your credit score must be at least 580 to qualify. APRs range from 9.95% to 35.99%, and repayment terms range from two to five years.
- takes your educational background and experience into consideration when assessing eligibility. You can borrow as little as $ 1,000 and get your money back within one day of approval.
These lenders tend to have higher than normal interest rates compared to other personal lenders. However, they are all much cheaper than payday lenders.
If you have an account with a local credit union, it may be easier for you to qualify for a personal loan. Most credit union interest rates are capped at around 18%, even for those with low credit ratings.
Many credit unions also offer payday loan alternatives – offer small loans and short repayment terms ranging from one to six months. Many credit unions require you to become a member before borrowing, but are willing to work with you if you don’t have good credit.
Recruit a co-signer
If you can’t get a loan from an online lender or credit union, you can get a friend or family member to co-sign a loan. The co-signer must have decent credit; it’s their score and their credit history will help you overcome the qualifying bump. Keep in mind that if you fall behind on payments, not onlysuffer; the same will apply to your co-signer.
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