You’ve probably heard of payday loans, but maybe you don’t know what they are, or even why they’re called that.
Simply put, payday loans are short-term loans that people generally take out in between paydays. They do it because they need some quick cash to cover expenses they couldn’t otherwise afford. You put up collateral (usually a check for the amount you’re borrowing), get the cash immediately, and then must pay back the loan in two or four weeks.
Sounds pretty good, right? Hey, everyone gets into a bad spot with money now and again and needs a little help. But there are some things you need to keep in mind if you’re going down the payday loan route.
Let’s help you out with three of those.
Payday Loan Laws Differ by Area
Depending on the state, province, or country you live in, the laws surrounding payday loans differ quite a bit. You can get payday loans at brick-and-mortar loan institutions or even online.
Some jurisdictions regulate payday loans by capping the amount people can borrow and what the institutions can charge you in loan interest. Some places in the world have outlawed payday loans completely. You’ll need to check your local laws before looking for a payday loan at all.
Payday Loans Come with High-Interest Rates
The crux of the whole payday loan issue is the exorbitant interest rates that lenders can charge borrowers. The amount will vary by your location and the lender, but we’re talking amounts up to 300% or 400%, sometimes more. You could take out a loan for a few hundred dollars and then owe the lender a certain fee for every $100 of the loan. You’ll owe the total by the due date.
Payday Loans Could Create a Borrowing Cycle
If you aren’t careful, payday loans could lead you down the road to a debt cycle. This happens when people don’t have enough funds in their bank accounts to repay the loans by the due date.
So, they then must take out another payday loan to repay the first one or else extend the date of the original loan, while still paying the associated fees. Essentially, if you needed the payday loan in the first place, you may find yourself in trouble at some point if you keep taking out loans. The best way to avoid this is to be fiscally responsible after getting the loan so you will have enough to repay it and move on.
Payday loans can be a quick and easy way to get some cash for debts you don’t want to miss paying. But if borrowing one time only leads you to borrow a second time, and so on after that, a payday loan may not be for you. Consider the pros and cons before acting.
Interesting Related Article: “Emergency Payday Loans Supporting Borrowers with Bad Credit“