Payday loans are often the go-to example of predatory lending. With outrageously high interest rates and extremely short windows for repayment, it can seem like a product no reasonable person would want. But they do — thousands of people use payday loans, many on a regular basis. It isn’t because they don’t know better or don’t understand how the terms of these loans hurt them. Often, people use payday loans because their other choice is immediate, harsh consequences of not paying bills on time. Payday loans can be an acceptable option as long as they’re used properly, especially if you have no alternative options.
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What Is a Payday Loan?
A payday loan is a short term, high interest loan designed help the borrower pay off immediate financial obligations. They are generally in smaller amounts, a few hundred dollars, similar to a regular paycheck. This is where the name comes from: people often use payday loans to cover expenses when their paycheck won’t deposit or pay out in time to cover bills, debts, etc. The average amount is $375, probably more money than you feel comfortable asking a friend for. The APR on these loans are often as high as 400 percent, so you can imagine how this could become a very expensive situation very quickly.
What Does It Take to Get a Payday Loan?
Part of what makes payday loans so appealing is that there is surprisingly little required. You really only need some basic things:
- Proof of income
- A phone number
- An open checking account
Of course, requirements vary depending on where you get your payday loan, but it’s generally very quick. There is no credit check, which is very attractive to those who are struggling to keep their credit score afloat. You can literally walk out with cash, or you can even apply online, although this will generally take a little longer to process.
If you have these things, the process is very streamlined. You’ll apply, write a post-dated check for the amount that you intend to borrow, and if you’re approved than you’ll be given the loan.
Are Payday Loans Predatory?
This is a complicated question. While payday loans can help people with nowhere else to turn, they can extend the cycle of living in debt. The terms of the loan are so outrageous because their customers have no other option. This is a way of preying on desperation, but it has the potential to keep the lights on and the water running until your next paycheck as well.
If you fail to pay back your loan, the lenders will cash that check or otherwise access your bank account to get their due. However, if you don’t have enough to cover the amount (for example, the regular paycheck you were waiting on isn’t enough or isn’t deposited on time), that 400 percent interest can make things very expensive very quickly.
Most borrowers have difficulty paying off their payday loan, about 58 percent. Perhaps not surprising, given high interest rates and the short term of payday loans. You usually only have two weeks to pay everything back. If you really need a couple hundred dollars to the point that you’re willing to risk 400 percent interest on that loan, what are the chances that you’ll have that money in two weeks?
The nature of them makes it seem like they are taking advantage of desperate people, which is true. Many borrowers end up in vicious cycles of debt, unable to pull themselves out amongst all the interest and fees. However, for some people, payday loans are legitimately their only option.
Should You Ever Use Payday Loans?
Despite the risks, some people have used payday loans to great benefit. If you are considering taking out a payday loan, ask yourself these two questions first:
Is this really an emergency?
If you absolutely must have this money now to get through the month, then a payday loan might be an option. However, they should never be used for luxuries. Sometimes it might even be worth it to take a late fee from your bank over a payday loan. At least that doesn’t cost interest.
Will you have enough to pay it back on the due date?
Sometimes, your paycheck is going to arrive just a little too late. If you know that you will have the money by the due date, but you just need it now, then you can consider a payday loan. Keep in mind, though, that if you don’t think you’ll have the money, you’re really just causing more money problems for yourself. If you can’t pay, the loan will go to collections, who will continue to hound you until you send a cease and desist letter.
Payday loans definitely have a place in emergency financial relief, but they should only be used sparingly and in very limited circumstances. The unfortunate reality is that many of the people taking out payday loans will not have the money necessary to pay it back, and will be paying back several times what they initially borrowed. However, payday loans may be a necessary evil in order to recover from a sudden financial misfortune.
Want to avoid payday loans and increase your credit score? Visit our credit score resource and learning center for tips and guides. For more help with dispute letters, visit our letter template resource center.
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