What Are the Best Payday Loans?
Many are interested in getting a payday loan. But to have good terms, it is very essential to find the best payday loans.
About 12 million Americans take out the best payday loans each year. It is a type of short-term borrowing with high-interest rates. Also called check or cash advance loans, the principal of payday loans is normally a part of the next paycheck of the borrower.
These are common characteristics Pew Research Center found among payday borrowers:
- Not homeowner but renters
- Annual Income less than $40,000
- Not completed a four-year degree in college
- Separated or divorced
- Are often African-American
Based on the same report, by the time the first loan is repaid, the typical borrower has taken out eight loans, each amounting to $375 and $520 spent on interest alone.
How Do They Work?
For instance, you need to buy new tires for your car and decide to borrow $300 from a payday lender. Payable to the lender, you will make a personal check that is postdated for $340, plus $40 for finance fee.
When applying for a payday loan on the internet, all the info are entered online. The lender then advances you $300 for a set period, usually 14 days.
By the end of the period, your payment to the lender will be a cash amount of $340. A check that is post-dated will be deposited, with an additional finance fee. If the debt is not paid in full, additional fees will be charged.
Extremely high levels of interest are charged by payday lenders. That can go up to 500% in annual percentage yield (APR). In most states, usury laws limit interest charges of installment loans to less than approximately 35%. However, payday lenders have exemptions that give them the right to demand high interest.
Should I Apply for a Payday Loan?
Before applying for a payday loan, consider other options first. Ask yourself if the case is an emergency or not. It is a fact that payday or personal loans are helpful for a one-time emergency such as medical fees.
They are not a sound idea to cover unnecessary expenses. Is it possible to wait a while before buying new tires or to buy those tires when you receive your next paycheck?
This arrangement may be more economical than paying charges for a payday loan.
What are the advantages?
During an emergency, payday loans can be a good source for quick and easy borrowing cash.
For instance, you may ask a payday lender for an immediate and temporary financial aid such as the need to pay a medical bill, car repair or other one-time expense.
Payday loans can be helpful for people who are not credit cards users or have no available savings. Because this loan type does not require a traditional credit investigation, and they are easy for people with financial problems.
What are the disadvantages?
It is imperative to repay a payday loan as soon as possible. When they are unable to repay quickly the debt, many people get into trouble with these types of loans.
Being unable to repay the title loans at the end of the term, you’ll be charged expensive additional fees. Being stuck in larger financial problems is the result of being in a payday loan cycle for a long time.
Payday loans compared to other methods of borrowing money are also much more expensive.
In many instances, 400 – 500% is the average annual percentage rate (APR) on a payday loan.
If possible, it is better to use a credit card or tap into your bank account in the event of an emergency since credit cards have APRs from 9% to about 30%, while APRs of personal loans are generally lower than credit cards.
Payday Loans and Usury Laws
Most states adopt specific laws to regulate the lending industry. Usury laws regulate and define the terms and rates permissible.
Some states have laws regulating how much the payday lender can lend to borrowers and how much they charge per loan.
Payday lending outright is banned in states like New York.
These laws are variable and payday lenders work and get permission by working around these regulations and partner with banks based in other states. You have to read the small print on the payday loan offer.
Alternatives to Payday Loans
- With your creditor, negotiate a payment plan.
- The amount is charged to your credit card.
- Request an advance from your employer.
- Use overdraft protection from your bank.
- Obtain a line of credit from an FDIC-approved lender.
- Use the money from your savings account.
- Borrow money from a relative.
- Apply for a traditional small loan.
- Ask for more time to pay your debt from creditor.
- Use the cash advance from your credit card.
- Be sure you understand all terms before applying for credit.
- Go around and search for reliable lender whose rates and fees are lower.
- Borrow only the amount needed for unexpected expenses you know you can pay back with your next paycheck.
- Your first priority on payday loans should be to pay back immediately.
Payday lending is big business
Involving millions of money, payday lending is big business. According to The Community Financial Services Association of America (CFSA), they have more than 20,000 member locations.
About 19 million American households have taken out a payday loan at some point.
Dangers of Payday Loans
Extremely high-interest rates are the most obvious problem for payday loans. With their fee anywhere from $10 to $30 per $100 borrowed, this would amount to an annual interest rate of 261% to 782%. But there are also other dangers.
These dangers include:
Fees for renewal
When borrowers are unable to pay back a payday loan on time, the loan is either renewed or taken out as a new one.
So even though loans are being paid, you will notice that the amount owed is never deducted.
For instance, a borrower starts out with a $400 loan and a $60 interest rates and then the loan is renewed every two weeks for four months, the borrower will end up paying about $480 in interest – and will still owe the original $400.
In theory, a payday lender has no problem collecting a debt, because the money can be taken right out of your checking account.
The problem is if that account is negative, the direct lender gets nothing – and the borrower gets stuck paying a hefty bank fee.
But the lender never stops collecting with just one attempt. He will continue to collect the money. They often use the installment strategy by breaking up payments into smaller amounts that are more feasible to repay.
And, at the same time, online lenders start harassing the borrowers with calls and letters from lawyers. If they are not effective, the lender will decide to sell your debt to a collections agency. This agency, aside from calling and writing, can sue you for bad credit. If it wins the case in court, the court gives the agency the right to get assets or get your wages.
Impact on credit
Before issuing you a loan, payday lenders generally never check your credit score. They felt that for such a small amount at such short terms, it will be too expensive to hire a credit investigator for each client.
However, if you are unable to pay back your loan, the credit bureaus are still able to find you.
Even if there is no report from a payday lender, the collection agency will buy and it will often damage your credit score.
Yet if the loan is paid back according to schedule, the amount paid is not included in the report to the credit bureaus, so there is no improvement in your credit score.