Payday loans are maybe the most expensive way to borrow money. Therefore, if you aren’t sure how to pay it back on time, never take this loan. Otherwise, things can get out of hands really fast. So, if you are still thinking of getting one, then here are a couple of things you should know.
How does payday loan work?
They are designed as a short-term solution to help people with financial difficulties until payday. In this case, the money is directly transferred to your bank account, and you repay at the end to of the month, with interests.
Additionally, you can borrow money for more extended periods, usually three months, and you repay in monthly installments. All these loans have a few things in common; they are short-term, high cost, and provide small amounts.
You have time until your next paycheck to return the borrowed amount, with interest included. However, keep in mind that payday loans could be an expensive solution if you are unable to meet terms and conditions. For that reason, think carefully before you make the next move.
Even though many states allow this type of lending, they might also set a cap on a loan amount and interest you might be charged with. So, depending on your residence, you might have to pay interest up to $30 for every $100 borrowed.
What are the issues associated with payday loans?
According to some estimates, nearly 12 million Americans take out payday loans every year. This means they are repaying almost $9 billion in loan fees. People who earn $30,000 a year mostly use payday loans and have a lot of troubles making ends meet.
- But, while they can offer you emergency cash, payday loans involve some risks you should be aware of.
- High interest – let say you get a two-week $500 loan that charges $15 on every $100. When we express this in an annual percentage rate, it means you are paying an APR of nearly 400%.
- Sort-term – the person who borrowed money needs to repay the full amount within four weeks.
- Extra fees – if you don’t manage to repay this loan on time, then you might be charged with additional fees, on top of the initial loan. Therefore, these charges start adding even if you roll the debt over. Based on some statistic, payday loans are re-borrowed nine times or more.
- Not enough funds – if you don’t have enough money on your account when the lender tries to cash out your check, then you will be hit with additional fees.
- Rollover fee – it is charged on top of the initial amount, or when you try to push back due date.
Even though this might seem like a quick fix, there are other options, which can keep you out of the circle of debt. For instance, consider credit union, your current bank, paycheck advance, debt settlement, or emergency personal loan. If you are looking for quick cash, then a payday loan might make things worse.