Reasons to Avoid Payday Loans

 

There are many occasions when it can be tempting to take out a payday loan for an emergency. You may wake up one morning to find that your car has died and you cannot get to work without getting it fixed. You may find that there has been a massive storm and suddenly your roof is leaking. If you have poor or bad credit, a payday loan can seem like a perfect solution to your immediate financial problem. But is it really?
What are Payday Loans?
Payday loan stores have popped up in every community across the country and they are advertised on television constantly. They are short-term loans that are paid back within seven to 30 days of taking out the loan.
Often payday loans are taken at very high interest rates, ranging from 300 to 900 percent and even higher. If you are unable to pay back the payday loan within this short period of time, you can make arrangements to pay it back over a longer period of time, but it is likely your interest rate will be even higher and your payments astronomical.
Retail payday loan stores often give payday loans in the amount of $100 to $500 and you have to give them a post-dated check for the amount of the loan, plus any fees and interest that is charged.
Online payday loans can be in amounts as high as $1,500 and usually are limited to no more than half of your take-home paycheck income.
Payday loans are very easy to qualify for – usually only needing verification of income, proof of identity and a bank account.
Payday loans also do not require good credit for approval. Very few, if any, payday loan companies require a credit check as part of their approval process.
Disadvantages of Payday Loans
While it can be clear to see why payday loans can be attractive if you are in an emergency situation, there can be some major disadvantages with borrowing money this way.
First and foremost is the high interest rates that are charged for payday loans. Since payday loan companies are only offering short-term loans, they get back their money quickly and for a very high price. If you are taking out a small loan from a payday loan company, you may find that it is not worth it pay the high interest rates they charge. A better alternative is to use a credit card for a small short-term loan.
Another disadvantage with taking out payday loans is that there are very few regulations on the industry. They can charge just about any interest rate they choose for lending you money. The argument given in by most payday loan companies is that they are offering a service to those with poor or bad credit, who cannot get loans otherwise.
The only good regulation on payday loans is that they are only allowed to charge no more than 36 percent APR to military personnel. This is to prevent them from getting over their heads in debt and placing their military clearance in jeopardy.
There are many reasons to avoid taking out a payday loan if you are in an emergency situation. Alternatives to payday loans include using credit cards for short-term emergency situations and borrowing from friends or family.