Why Payday Loans Are Not a Good Idea

Payday loans are fast and easy but come with huge fees and significant interest rates. Learn why they're not a good idea and explore responsible alternatives.

Why Payday Loans Are Not a Good Idea

Payday loans are a financial quicksand, with many borrowers unable to repay the loan in the typical two-week repayment period. Is it bad to get a quick payday loan? Absolutely. That's because they come with huge fees and significant interest rates. Yes, applying for a personal loan means getting more into debt, but it will cost much less than a payday loan.

This may not be an option for many people, especially those who lack savings and don't have a credit card. Some people in this predicament, especially those with bad credit or no credit, turn to payday loans. They are fast and have minimum borrowing requirements. But they are heavily regulated and illegal in some states, due to their very high fees and difficult exit strategy.

A payday loan is essentially an advance on your next paycheck. You give the payday lender your paystub as proof of income and tell you how much you want to borrow. They give you a loan for that amount, which you are expected to pay when you receive your paycheck, along with the payday lender's fee. People with little credit are natural customers of payday loans.

The borrower can apply for the loan and not worry at all that his credit is ugly or non-existent. This type of loan is easy to apply for, but it can be very risky. Payday loans charge high interest rates and often have hidden fees. This makes it very easy to get caught in a debt trap where it becomes very difficult to repay your loan, even if you only borrowed a small amount to begin with.

The best way to avoid having to rely on payday loans is to create a budget that covers your expenses. While payday loans typically don't appear on your credit report from major reporting agencies, they can be found if a lender conducts an application search to find out all the loans you have borrowed. Other states do not have specific provisions for payday loans or require lenders to meet interest rate limits on other consumer loans. So, while payday loans can't help you build credit, they could hurt your credit if you're not careful. It will require sacrifice on your part and a commitment that the alternative to a payday loan is to be very disciplined with every penny you earn.

The term of payday loans is so short that many borrowers cannot raise enough money to pay on time. One of the biggest pitfalls that can occur with payday loans is when a borrower enters a cycle of repeated extension of their loan. Loan comparison tools like Monevo can help you quickly and easily compare lenders, check rates, and see what loans you can prequalify for. The payday loan process is generally straightforward, but if you fall behind on payments, you're likely to have problems in the future. Payday loans generally do not involve credit checks and your ability to repay debt and at the same time continuing to pay your daily expenses is not considered part of the application process. We'll explore some responsible alternatives to payday loans at the end of this article, but first let's discuss how to qualify for payday loans.

Sellers or these quick payday loans (loan sharks) usually target people who don't have good credit or decent savings. Unlike a car title loan, traditional auto loan, or mortgage, payday loans are not secured. Once again, you are required to repay the loan before your next payday, which will typically be within two to four weeks from the date you receive the loan. The best way to avoid getting into financial trouble with payday lenders is by understanding how they work and avoiding them altogether. If you find yourself in need of quick cash, there are other options available that don't come with such high costs or risks. You can look into getting an advance from your employer or taking out a personal loan from a bank or credit union. You may also be able to get help from family or friends if needed. No matter what option you choose, make sure that you understand all of the terms and conditions before signing any agreement so that you know exactly what you're getting into.