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Payday loans can be tempting to use when you are strapped for cash. Some people use payday loans as a back option to ensure that their account balance doesn't get too low or to have a certain dollar amount in their bank account. This may seem like a good way to get you from one payday to the next, but with consequences. Once you start using payday loans, it can be difficult to stop.
Payday Loans and How To Avoid Using Them
Payday Loan Interest Rates
Payday loans typically come with very high-interest rates, often with an APR (annual percentage rate) of 400% or more. This means that if you borrow $200, you could end up paying back $800 or more in fees and interest over the course of a year. The high interest rates make it challenging to pay off the loan and can lead to a cycle of debt.
If you are really cash-strapped, other alternatives may help get you to the next payday. One option is talking to your creditors or utility company to see how your payments can be adjusted or delayed until you have the cash to make your next payment. You will be surprised how flexible some companies are when it comes to requesting a payment extension or reduction.
See my feature in: 10 Signs Your Spending is Out of Control - and How to Address It
Short Repayment Terms
Payday loans usually have to be repaid within a few weeks or on your next payday, which can be difficult if you're already struggling to make ends meet. If you have had a payday loan, did you find yourself in a deeper financial hole when it was time for you to close the loan? Did you have to get another payday loan to repay the original one? The short repayment term is built into the loan so that you can keep returning to the payday lender repeatedly. It can also make it challenging to come up with the funds to pay off the loan in full, which can lead to rolling over the loan and incurring more fees and interest.
Payday Loans are Easy to Access
Payday loan lenders are on every street that you drive down. Today, you can also find online payday lenders that don't require a credit check or are okay if you have bad credit. This can make it tempting to use them as a quick solution to financial problems, even though they come with high costs. The lenders don't care if you have bad credit or if you don't have the means to repay the loans. Typically, you will have to put down some sort of collateral, like your car or home. The lenders know you don't want to lose these valuable items, so they are willing to let you put everything on the line to get you to the next payday.
You Have Limited Options
Payday loans may seem like the only option if you have limited access to credit or are facing financial emergencies. This can be especially true if you don't have good credit or cannot qualify for other types of loans. If you've been declined by your local bank or your family or friends cannot provide assistance, it can cause even more financial turmoil. However, there are ways out of the cycle of using payday loans.
See my feature in Yahoo: Black Americans Are More Likely to Be Denied Credit
What's Next?
To break the cycle of using payday loans, seeking alternatives, such as budgeting, saving, and financial assistance from local non-profits or government programs, is important. You can visit sites like findhelp.org to help you find options in your local zip code for financial aid, food, work, healthcare, and transportation resources. You should also consider working with a financial counselor who can help you develop a plan to manage your finances and avoid relying on payday loans in the future.