A payday loan is a short-term, high-cost loan. Typically, you can take out a loan for $500 or less for unexpected purchases at the end of the month. You must repay this amount the next time you’re paid, hence the name of the loan. These loans are seen as a stop-gap until you’re paid. They’re available from storefront lenders and online, but you must really understand what you’re getting yourself into before accepting this loan.
Why Payday Loans Are Controversial:
Over the years these loans have become really controversial. There are many reasons for this, including:
– They add up really quickly because they have a really high annual percentage rate (APR) of at least 2% and often as high as 6%. You can’t honestly compare this APR to the real cost of a payday loan because the way you calculate an APR isn’t meant for short-term lending.
– In addition to paying the APR you must also pay other fees ranging from $10 – $30 for every $100 you borrow.
– The combination of the APR and the other fees is quite high. For instance, if you accept a payday loan with a $15 fee per $100 borrowed, you’re paying about 400% in an APR. Credit cards are much cheaper.
– Many people feel that lenders target vulnerable borrowers. They feel the lenders don’t make sure the borrowers can actually afford to repay the loan before making it to them. Oftentimes, when you can’t repay the loan you’re encouraged to take out another loan to repay it. This creates an endless cycle circling you further downward into the debt cycle.
– These loans are actually quite deceptive if you don’t know or understand what’s involved and what you’re getting into when you take one out. This is because the costs associated with them isn’t always really transparent.
– Lenders aren’t required to do any affordability checks before giving you a loan. They don’t know if you can afford to pay it back. Instead, they’re trusting you to understand the process and decide if you can afford it. If you rush into getting a payday loan because you’re in a time of crisis, you could end up in more of a financial mess then you’re already in. This is why those who believe that payday loans are controversial are trying to enact laws that regulate or prohibit them all together.
Considering a Payday Loan:
It’s important to consider whether a payday loan is right for you before you take one out. Don’t go into a payday loan office blind. They’ll ask you to write a post-dated check for the amount of the full balance and any extra fees so they can electronically debit you on your next payday. You’ll have other financial obligations at that time so you may not have the money to repay your loan. Lenders deduct the money from your bank, credit card, or prepaid card account nonetheless. So, make sure you can honestly afford the loan before accepting it.