One of the easiest ways to get money when you need it right away is to get a payday loan. These loans are available in most places—and online—and they usually advertise how easy it would be to get one. A huge problem with these loans is that they often become debt traps for borrowers.
Payday loans go by many names and sound like a good thing to get. Other names include easy loans, same day loans, payday advance, payday loans bad credit, payday loans no credit check, and more.
In most cases, the names of these loans indicate that they are easy to get—but there is no hint of how difficult it can be to pay it back. What they never reveal is that these lenders, according to StopTheDebtTrap, make about 75 percent of their money from people who borrow from them more than ten times a year. These borrowers often cannot repay the loan without taking another loan from them. It is why many financial counselors have labeled the industry as “predatory.”
The borrower takes out a loan and writes a check to the lending company. It is dated for when the loan is due—with interest. Regardless of the borrower’s ability to pay for other debts and even food, the check is cashed. Since these loans are frequently to people with lower incomes, it becomes almost obligatory for them to take out another loan to make ends meet until the following payday—and the cycle of debt begins.
Payday loans are usually short-term and usually must be repaid in full at your next paycheck. A few of them may allow payments, but most do not. Loan values average $500 and are rarely more than $1,000, but some may go as high as $1,500.
California may be one state that has the most regulations applicable to this industry. They only permit one loan at a time, and you cannot use a new loan to pay off an existing one.
Payday loans often come with a very low-interest rate the first time you borrow money—possibly even as low as five dollars for a $200 loan. The borrower finds it easy to repay it and then takes out a larger loan—one with their normal interest rates of as much as 300 to 400 percent APR. In addition to the high-interest rates, there may also be hidden fees.
Some payday lenders, LendingTree says, will let borrowers roll over their loans. Although it extends the due date, it also means that new finance charges get added to the loan.
Congress has attempted to curb these predatory tactics, but it has stalled. Presently, according to NBCNews, 20 states and Washington D.C. have addressed the issue and passed laws setting a ceiling interest rate for payday loans. Although some states, such as California, place the ceiling at 15 percent, most states go as high as 36 percent. The remaining 30 states have not yet passed any laws on these predatory lenders.
Most payday loan companies do not report to any of the major credit reporting companies, the Consumer Financial Protection Bureau reveals. The Bureau also says that if you are late to repay the loan, it may get sent to a debt collector—who may report it to a credit reporting company. Because these loans usually are not reported to a credit bureau, they cannot hurt or build your credit score. Because there is no credit check, even people with bad credit can often get this type of loan.
The requirements to get a payday loan are quite simple. The ease of getting one of these loans makes them attractive to people needing quick cash. The four requirements include being able to prove your identity, having a checking account, having a job, and you must be over 18.
Since payday loans can put you into a cycle of dependency on them, finding other sources of cash is a much better solution. Here are some possible alternative sources of money that are much safer.
Payday loans should never be your first choice to get cash when you come up short. There are better ways. If you often have financial trouble, you may want to contact a financial counselor. They can help give you the tools you need to get out of debt and stay debt-free.
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