Payday loans are either presented as an invaluable solution for those who need money or predatory loans seeking to take advantage of those in dire straits. In reality, they are simply another form of loan you can take advantage of with similar costs and risks to any other type of loan. The only major difference is that they’re typically short-term loans. Here are six things you should consider before getting a payday loan.
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Understand How Payday Loans Work
Payday loans are generally limited to a fraction of the money you bring home in your paycheck. They’re intended to be paid back next pay period. The fees and interest owed on the loan compound if you have to roll the loan over a few months. Furthermore, in some states, the number of times you can rollover the debt is limited by law. You can learn more about this topic on the Bonsai Finance blog.
One of the benefits of payday loans is that they’re based on your paycheck, not your credit score. This means you don’t have to have a good credit score to secure a payday loan. You can get a payday loan without a credit history as well. This makes getting approved relatively easy once you prove you have a job and are likely to repay the loan. Remember to take any paycheck deductions into account so that you don’t borrow more than you can pay off next pay period. If you can’t pay the debt back fast, consider using your credit card instead.
Know the Costs Associated with the Loan
Payday loans are more expensive than traditional loans if you roll over the debt. For example, you may pay $20 to borrow a hundred dollars for two weeks. That’s a 20% interest rate on the debt, but it is more than a 100% annual percentage rate. Roll over the debt a few times, and the fees could equal the loan balance. This is why we say you should make certain you can pay the payday loan back as soon as possible. And don’t borrow more than you can afford to repay.
Understand Your Alternatives
Payday loans may be better than the alternatives. For example, if you write checks in the hope that you’ll get money on a certain day, there could be an issue if something unfortunate happens. Therefore, a payday loan that lets you pay cash for car repairs may be better than writing a check you can’t honor. Note that you shouldn’t write a check to the payday lender you can’t honor, either. If the check you write to them bounces, this will end up in your financial file and could result in overdraft charges, too. Also take the time to talk to your bank about overdraft charges, since these can add up over time.
Learn about Your Options
Banks have started to offer payday loans, putting them in competition with conventional payday lenders. However, banks are not always the better choice.
For example, they may require you to have a certain credit score to qualify. They will also often require access to your bank account as a condition of the payday loan. This can cause problems if you want to roll over the debt. At any time, they could collect money from your bank account even though you may need the money for something else.
Conventional payday lenders cannot access your bank account unless you give them permission which gives you more control on when the money leaves your account. However, if you fail to pay what you owe to the payday lender, they can sue you and pursue the debt.
Recognize that you have other options. You can seek an unsecured loan from a financial institution, or you could open a credit card for emergency expenses. If you’re considering a payday loan to manage otherwise unmanageable expenses, call up your lenders and ask for a loan modification or payment plan. Starting a part time job to earn extra cash can help you raise money, though that’s not always an option. If possible, ask for overtime at your current job to ensure you can pay off the loan next pay period.
If you have an emergency cash fund, tap into that before you go into debt. You can also borrow via peer to peer lending sites. Long-term, you want to improve your credit so that you can borrow from conventional lenders at a low interest rate.
Do Your Research Before You Sign Up with a Payday Lender
Suppose you have no alternative to a payday lender to raise money now to pay for emergencies like unexpected car repairs or medical bills. Don’t rush the decision to take out a payday loan. You can shop around to find one with the lowest fees and interest rate.
Never make the mistake of signing up for the first site that promises you a loan. Understand that lenders will be bound by state law, and your loan request could be rejected because the loan terms aren’t within the laws they’re obligated to obey. The issues can range from failing to agree to their conditions of use and the e-consent box, to an excessively high loan request, to trying to borrow from a lender that cannot issue loans to residents of your state.
Take the time to research the potential payday lenders, because the last thing you want to do is sign up for a site and watch them run with your money. Also, read the terms and conditions of the loan. If they require you to agree to terms you won’t accept, don’t sign the agreement. Instead, move on to the next potential lender on your list.
Pay Attention to the Loan Approval Process
Many borrowers rush through the approval process. However, you need to follow the proper process if you want to maximize the odds that your loan will be approved. Gather up all the necessary documents in advance such as your identification and copies of your pay stubs.
Payday loans can be helpful when you don’t have many other options. However, you still have choices regarding the loan terms, the lender you select, and how you pay off the loan.