Anytime you see a commercial or advertisement for payday loans, they always appear to be a quick, effortless way to get the money you need when in a financial emergency. Most adverts explain how you can get an instant loan of $100 with just a recent pay slip and blank check from your banking institution. While these ads are true, what they fail to mention is that the $100 you received could turn into a financial burden that could take thousands of dollars to pay off or worse, cause you to seek out payday loan relief services. Get educated and know the truth about payday loans to keep yourself in good standing.
Payday loans allow you to borrow funds that are to be paid back once you receive your next paycheck. Most lenders only ask for a postdated check for the total amount due including the lending fees and a form of identification. The lender calculates the amount of your loan fee either as a percentage of the loan amount or a fixed amount per amount borrowed.
Once you write the check and complete the scanty paperwork, the lender either pays you cash or does a direct deposit into your checking out in the amount of the loan. By your next payday, if you have enough money to pay off the entire loan, leave enough money in your checking account so the lender can cash the check you originally used to apply for the loan. You also have another option to extend or “roll over” the loan if you cannot afford to pay at the next pay period. Extending the loan automatically exposes you to another fee on top of the previously agreed fee and a new fee is charged every time you extend the loan for another period. Knowing the truth about payday loans, their fees and penalties are critical! Be aware.
Payday loans range from $100 and can be up to $6,000. Usually the lending fee is around 15 – 30% of the loan amount. This means that for every 10 – 15-day payday loan that you collect, you can be paying as much as $15 on every $100. Your effective Annual Percentage Rate (APR) could be as high as 600%! The most expensive credit cards charge as much as 15 times less, process that for a second.
This means that if for example, you took a payday loan of $300 for 14 days and fail to pay it for up to two months, your total fees from rolling over will be around $210 in fees. If you did the same on a credit card, even factoring in late charges, you will not pay up to half of that in fees.
It got so bad that studies carried out by the Center for Responsible Lending in 2006 showed that the average payday loan borrower paid $793 in fees and interest charges on a loan of just $325. This charge came about through late fees and rolling over fees on the loan. Some borrowers even end up using a new loan to cover an existing one and before they know it, $100 quickly snowballs into thousands of dollars in debt, causing a need for payday loan relief.
Your credit score is also at risk if you are unable to pay off your payday loan because once the postdated check is deposited, it will bounce. Once that happens a few times, your credit score will be destroyed, leaving you unable to access further credit in the future, another cost of payday loans.
Another recent survey showed that payday loan borrowers are among those most likely to be bankrupt. It showed that a payday loan user is twice as likely to get bankrupt as someone who was rejected for such a loan.
Payday loans are not just bad for you, they are very, very bad and can quickly turn into a slippery slope causing you to fall into debt, ruin your credit score and needing payday loan relief or even bankruptcy.
When you have an emergency need for cash before your paycheck is due, there are some alternatives that can serve as stopgap measures for you without leading down a dangerous road. Now that you know the truth about payday loans, here are some great alternatives: