A payday loan also called a “cash advance” or “check advance” loan, is a type of unsecured personal loan based on how much you earn. These loans charge borrowers with high interest and short-term repayment demands.
Due to their extremely high-interest rates, payday loans may be considered predatory lending. A predatory lender usually doesn’t consider the borrower’s ability to repay and charges them with added fees through hidden provisions.
Payday loans can keep you in a cycle of debt, but you can break free of this by considering other options. Read on to learn why payday loans are not an ideal option for you and the better alternatives.
How Payday Loans Work
There is a limit on how much you can borrow in most cases. The amount can range from $300 to $1,000, with $500 being the most common amount.
Payday lenders charge all borrowers the same interest rate. It can be as high as 780% in annual percentage rate (APR), with an average loan running nearly 400%
Payday loans must be paid back once you get your next paycheck. The loan term can go from two weeks to a month.
A regular personal loan allows you to pay back the money in installments. With payday loans, however, you have to pay back the interest and principal all at once. This amount is usually much more than what your budget can handle.
When taking out a payday loan, you sign a check or document that permits the lender to take money out of your bank account. If you fail to repay the loan as scheduled, the lender will either cash the check or withdraw the money from your account.
Alternatives to Payday Loans
If you need to borrow money, consider the following alternatives instead of getting payday loans:
Create a Budget
Evaluate all your expenses, including rent, utilities, and food, and create a budget. Know how much money is coming in and how you can afford to spend on your expenses. Then, find ways to cut down on unnecessary expenses to be more in line with your income.
Get Credit Counseling
If you need help dealing with your debts, you may get credit counseling. There are non-profit agencies that offer credit advice at low to no cost. They can also help you set up a debt management plan (DMP).
Your Best Option
Getting a personal unsecured installment loan from the credit union is a much better option than a payday loan. With lower interest rates and fees, they are most especially beneficial for borrowers on a tight budget. With on time payments, it will even help build your credit and help you qualify for lower rates in the future!