Why You Should Avoid Payday Loans

Why You Should Avoid Payday Loans

In case you are unaware as to what a payday loan is, it is a short term loan that has to be paid back normally on the next payday. They are growing in popularity and many people are opting for this type of loan to help them make ends meet until the next payday. They seem to have their advantages, such as no collateral save a post-dated check, no credit checks, and fast approval times. These characteristics do not make the payday loan necessarily the best choice in all situations. Below are five reasons to try to avoid payday loans if possible.

High Interest Rates: The interest rates imposed on these loans may not seem that bad at first glance, being only $15-$50, depending on the amount borrowed, but when you compound that annually, you could easily be spending 300%. If you were to pay off the loan as scheduled, you would not notice the high interest rates, but if your financial situation is not the best, you could be looking at rolling over the loan and the snowball effect would begin.

Repayment time and terms: The time available for repayment of the loan is very short. These companies are known as payday loan companies, so their target is a 2-week loan. Some offer 30 day loans, but their primary target is 2 week loans. If the loan is a large one, the repayment plus the fees could eat up a vast majority of your next paycheck, essentially leaving you in the same boat you were in before you borrowed the first money. Most companies offer the rollover plan, but the fees usually double. Some offer installment plans if the repayment cannot be made in a timely manner, but the interest rates on those plans are astronomical.

Security Risks: Especially with online payday loan specialists, you have to be aware of the security risks involved in sharing your banking and personal information via the internet. Your bank account number, your social security number, and many other personal facts about you are out there in cyber space waiting to be hacked into by somebody that wants to steal your identity.

Hidden Terms: This is not true with all loan companies, so we cannot generalize, but several companies have hidden terms in their lending practices that include doubling the fee for a late payment of any kind. As with many agreements, hidden terms in the application process are usually one sided towards the lender.

Damage to credit: This is not true with all lenders, but some will affect your credit score. If your credit report shows too many payday loans, your credit score drops and your chances of getting real credit for something such as a home or automobile are diminished. If for some reason you are rejected for a payday loan, your credit report is badly affected.

Keep in mind that not all payday loan companies are out to ruin your credit, but remember that every business is in business to make money. These lenders are no different. They tend to make their money in short periods of time and do quite well at it. If you feel that you must get a payday loan, do so after exhausting all other options. Other options include borrowing from a family member or friend that will allow you a longer time to repay the money and normally at a lower interest rate. Avoid payday loans if at all possible, and you will be better off financially in the long run.