Payday cash loans are popular for a reason: they offer instant access to money for emergency expenses. Many of these loans have minimal requirements for approval, allowing individuals to take advantage of an easy, convenient method of borrowing cash.
What people forget, however, is that payday loans are like other types of loans... only with more constraints. While qualifying may be easy, there's a price to pay. The money borrowed is at a very high interest rate, payable within a very short period of time.
Payday loans serve as a temporary solution for a problem with cash flow. An estimated 12 million Americans borrow from payday loan companies every year. Many of these borrowers fail to meet their payment obligations. As a result, their loans balloon into larger and larger debts, based on exorbitant interest rates and late charges.
That's why you should avoid getting a payday loan, if there are other alternatives to address your urgent situation. If you are considering one of these short-term, high-interest-rate notes, it is critical to learn the common payday loan mistakes people make and the ways these can be avoided.
Failure to see payday loans as money for emergencies.
The main purpose of payday loans is to provide borrowers with instant cash for short-term money needs. However, some studies have revealed that many borrowers use these loans to pay for daily living expenses. More than 65% of borrowers also use the money to pay for recurring expenses such as food, rent, utilities, mortgage or credit card bills. Less than 20% actually use payday cash loans to pay for an emergency, such as a medical expense.
Failure to realize that payday loans come with high interest rates.
Typically, a $100 loan from a payday lending company will generate a $15 interest at maturity. That is about 390% APR. Lenders often show these fees as cost, although they can also be labeled as the interest rate. At these rates, borrowers should be careful about paying back the loan on time, not only to avoid late fees but also to avoid paying back the principal at a higher rate.
Failure to consider the time element of the loan.
The loan period for a payday loan is usually 14 days, so each loan matures at just two weeks. Within this time, the borrower is expected to pay back the loan in full.
However, there are cases where the loan
period is shorter, depending on the date of the borrower's next payday.
As attractive as a payday loan may be, many people still commit the
common mistake of ignoring the short loan period and, when they do, they
do so at their risk.
Failure to consider if they can afford to repay the loan.
lending is best for people who have a steady source of income and are
financially capable of repaying the loan. It is not and should not be an
option for those whose income is sporadic or seasonal – or have
no other means to repay what they owe.
Failure to explore other money sources.
People should realize that payday cash loans are best utilized for money situations where immediate cash is required. These loans are not for situations where there is access to other sources of cash, such as a savings or checking account.
If and when money emergencies come up, it pays to try to find other ways to generate cash without having to pay for high interests.
This article was written by Alice Joaquin.