You’ve definitely heard of payday loans from advertisements on television, but you’ve probably wondered if they were even a good idea. Many people make them sound very sketchy when in fact if you understand them and have a repayment plan, they could be beneficial. Unfortunately, they are not the cheapest loans. Despite the high fees and interest rates for payday loans, they are still frequently used. It is estimated that roughly 2.5 million Americans take out payday loans every year. This may be due to a lack of other finance options when an emergency hits. This is why financial planning is so important.
What is a payday loan?
Payday loans are short-term, small amount loans that are secured through a deferred presentment transaction. To obtain a payday loan, a borrower must provide a post-dated personal check or permission for a future electronic withdrawal. The loans are called payday loans because the full repayment is usually due on your next payday.
The payday loans often range from $500 to $5,000. The loans are often approved quickly but with high-interest rates. Often the finance charges are between $10-$30 for every $100 borrowed. The fees get added to the loan principal on the day of the transaction.
For a $400 loan with a $15 finance fee for every $100, the payday loan would end up costing you $460 within two weeks. If you were to calculate this as an annual APR, this loan is charging over 390% in interest. It would not be wise to obtain a payday loan unless you absolutely need it and are completely certain that you can pay off the loan in a short amount of time.
Why do people take payday loans?
There are some very unique circumstances where payday loans may actually make sense. If you have absolutely no savings and no or little credit, a payday loan may be your only option when it comes to unexpected expenses. For example, if you need a car repair quickly, you may consider a payday loan especially if it is your vehicle that helps you to earn money.
The payday loan will help you get money fast whether you have good credit or not. You will be able to get the funds quickly which is important during an emergency. When time is of the essence, you may not be able to shop around for the best interest rate and a payday loan may be your best bet.
The downside of payday loans
Payday loans can trap you in debt very quickly. If you can’t pay off the loan in a short amount of time, your interest rate and the fees included will keep you in a cycle of debt. Unless you have more money expected to come into your life quickly, a payday loan is not a good idea.
Most people who don’t have $500 for an unexpected expense today are unlikely to have $500 in two weeks let alone the finance charges and interest that they have just secured. Unfortunately, taking out one payday loan often leads to taking out more and more payday loans to keep up with the expenses.
It may be best to avoid payday loans by keeping your options for emergency financing open. Maintaining a good credit score will allow you to gain access to better loan options. Another way to avoid payday loans is by building up an emergency fund and earning extra cash.
Individuals who are proactive with their finances are often able to avoid payday loans and the costs associated with them. There are better alternatives to payday loans and one example is an online loan from Jora Credit. Apply today.