Payday Loans: Beware of These Dangerous Loans

Easy Money Doesn’t Come Free

Because of the financial hardships brought around by the present state of economy, many Americans continue to opt for payday loans for their short-term requirements of funds and thus adding to the popularity of these loans. This particularly holds good for families with low income. Getting payday loans is very convenient and quick, but is it worth taking such a loan?

Payday loans are small cash loans offered to individuals with the understanding that the amount would be paid back on the next payday. So, you may say it’s like withdrawing a part of your next salary a few days in advance. The repayment period depends upon the frequency of your payday. The borrower is required to give a proof of being employed and a check from the account with bank. The borrower then hands over to the lender a cheque equivalent to the amount borrowed and the fees. In some states the date of the cheque needs to be the same as the date of receiving loan. In such cases the borrower signs an agreement authorizing the lender to withhold the cheek till the loan is paid back in full. This agreement becomes obligatory, as many states don’t permit issuing of post-dated checks.

On the due date of paying back the loan, the borrower visits the lending store to payback the amount due. If for any reason the borrower is unable to visit the store, the loan company can straightaway deposit cheque in the bank of the borrower. In case the borrower is unable to pay dues as per the agreement, the lender may extend the loan at additional charges. Inability on the part of the borrower to repay the dues prompts the lender to threaten the borrower with check fraud or criminal prosecution.

The Downside of Easy Money

Most of the time payday loans are very expensive with finance charges varying from fifteen to thirty percent. Mind you, this charge of 15-30 percent is just for a couple of weeks and if you work out the annual charge it would easily be more than 700 percent.

As payday loans are very easy to obtain and there are no credit checks, the lenders typically target people in low-income groups because they are aware that such people are soft targets for their business. The problem is that this segment of consumers is   already facing financial difficulties and availing loans at such steep rates of interest further worsens their financial state. That’s the reason that quite a lot of such consumers are unable to payback loans in time and are forced to pay additional charges to the bank due bounced checks and are left with little choice but to seek an extension of the loan, incurring additional fees. That’s how they get caught in a vicious cycle. On paying the loan on the next payday, they realize that they are not left with enough cash to cover their expenses till the next payday. As a result, they go back to the same or another payday loan provider. This cycle goes on and on, as there is no restriction on the number of times the borrower can borrow money.

Payday Loan Alternatives

There are many ways to avoid getting trapped in the debt cycle created by payday loan. The simplest way is to have a separate bank account wherein you should deposit some percentage of your salary every time you get your paycheck. Plan your expenses and refrain from buying any unnecessary items. The money so saved should go to this account and you’ll surely see this amount growing up every month. While doing your grocery, buy only the items that you need and resist the temptation of buying extra items, even if offered at discounted prices. Make optimum use of your fuel and car by completing a number of small tasks in one outing. Look for cell plans that offer a base rate for the most often dialed numbers. All such savings come handy in case of any financial emergency.

You stand a good chance of getting some financial help from your employer unless you ask for it bit too frequently and are able to convey your emergency in the right manner. There are some employers who extend this facility to their employees, as any employer would like to retain good workers. The employer treats it as advance against your salary and adjusts the same on paying your next paycheck.  Depending on the kind of job you are doing and how you represent your case, you could look for some help in an hour of crisis.

You should also consider borrowing from a pawnshop. Usually one has some valuables of interest to a pawnshop. It could be some odd piece of old jewelry, some electronic device or even some tools. The pawnshop keeps such items as a collateral for providing short-term loan. So, you get some money and can still come back to collect the item you had left with the pawnshop. Even if you are unable to payback the loan, and the pawnshop retains your item, perhaps it might be a good riddance of some not so essential an item.  That’s still a better way of getting some cash rather than opting for an unsecured payday loan by paying steep fees and getting caught in a spiral of debt.

Though not the best, credit card advances may be a better option than a payday loan. Of course, interest rates are applicable here too, but it could help a one-time urgent situation. You should preferably have some financial arrangement for an emergency fund for any financial eventualities. Yet, on using your credit card, you may be required to pay about an interest rate of 25 percent, compared to 700 percent as payable on a payday loan. That’s certainly a better deal that any payday loan.

And, of course, you have that last option of seeking favor from a member of your family, or may be a friend. Usually, anyone would have some friends or people within the family to help one under some exceptional financial situations. Usually, such help is without interest and depending on the relationship and the financial status of the lender, the borrower can work out terms and time period for paying back the loan over a longer period. However, you shouldn’t overlook the possibility of the favor being returned at some pint of time. And, money is known to ruin relationships. So, it needs a prolonged thought and may be the last resort, again.

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