Payday loans are a risky decision that should be avoided due to their high interest rates and charges that can leave borrowers in a never-ending cycle of financial trouble. Many payday lenders are predatory and people often find it difficult to repay them. While payday loans may seem like a solution to a financial problem, they can quickly become a burden. The payoff period is usually only two weeks, making it difficult for borrowers to pay off the loan.
Payday loans are designed to trap people in a debt cycle. When an emergency arises and you have poor credit and no savings, it may seem like the only option. But taking out a payday loan can have a negative impact on your credit score, savings, and even lead to legal action. Prepaid debit cards are generally not considered abusive, but they have been criticized for their high fees. Fast payday loans come with a huge cost - they have significant interest rates.
Taking out a personal loan may mean getting more into debt, but it will cost much less than a payday loan. When you get a payday loan, you sign a contract that allows the lender to withdraw money from your bank account automatically. This means you have to pay the original loan amount plus interest and an additional finance charge. Payday loans are only a temporary solution to what is often a long-term financial problem. It's something you should learn to live without in the future.
The Consumer Financial Protection Bureau (CFPB) recommends standards that allow for lower-cost loans with affordable payments at 5% of the borrower's monthly income and a reasonable term of up to six months. Many borrowers choose to renew their loan instead of defaulting on it, and in some cases, the loan is renewed so many times that borrowers end up paying almost as much as the loan itself in fees alone. Payday lenders must disclose the financial charge and annual interest percentage rate (APR) in writing before signing the loan. Earnin and Dave are two services that offer earned wage advances instead of charging loan financing fees. They urge users to tip on their “free cash advance” instead. This is how most interest rates on bank loans and credit cards are calculated and give you the real cost of how much your loan will cost. Some states require payday lenders to be at least a quarter of a mile from each other and 500 feet from homes, similar to restrictions on sexually oriented businesses.
These easy loans come with a quick turnaround time, but borrowers often find it difficult to repay them once payday arrives. A decent rate for someone with bad or no credit taking an unsecured loan would be 5%. Overdraft can result in bank charges, but it would be better than dealing with a payday lender with aggressive collection tactics. The two main reasons people fall into the payday loan trap are bad credit and lack of savings.