Payday loans are a type of short-term loan that can provide high-interest credit based on your income. They are often used to cover unexpected expenses and can be taken out without the need for a bank account. However, payday loans are almost always more expensive than personal loans and come with a higher risk. This is because lenders must cover fixed costs, default rates, and the physical infrastructure to make the loan.
In some cases, payday loans may be the only option available. However, it is important to read the loan agreement carefully to identify all charges and costs before you apply for a loan. Additionally, 80% of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB), indicating that most of these loans are not repaid on time. Therefore, it is important to be sure you can pay back the loan before taking it out.
Payday loan stores are open longer than normal bank hours, allowing you to easily access cash regardless of the time of day. However, if the loan is not paid in full on the first payday, a charge is added and the cycle repeats. This means you don't have to give the lender any collateral or borrow an item of value like you do in a pawn shop. All of which is why payday loans are simply very expensive.
Personal loans are normally for much larger amounts of money than payday loans, but you will have much more time to repay this money. Additionally, lenders generally don't assess your debt-to-income ratio or factor in your other debts before granting you a loan. Therefore, if you are considering a payday loan, you may first want to look at safer personal loan alternatives.