Many working professionals, especially those who have recently started working, have experienced how easy it is to spend one month’s salary before the next payday arrives. A few costly, usually necessary, purchases at the beginning of the month can drain out all your money and leave you broke until the next payday. That is when payday loans come in handy. Such loans can be a method of making it through until the end of the month. But there are many subtleties to a payday loan that can make it either a very useful service or a nightmare.
What exactly are payday loans?
A payday loan is designed to be a short term borrowing service. The loans are usually arranged over days instead of years, but they can be continued for several months. Say for instance you are cash strapped in the middle of the month, and you need about $200 to make it until your next payday. The payday loan lender provides you with the money and sets a specified number of days after which you will need to pay the amount back with interest. As soon as you receive your salary, you pay the $200 plus the finance fee to the lender, loan is closed and you have successfully made it through the month.
Is it expensive to get a payday loan?
Payday loans have a fixed interest rate over the set number of days. Although this interest ate is relatively higher than most other borrowing options, it is generally not exorbitant for the set period. At the same time, it is not advisable to default on the payment of such loans as small amounts quickly spiral out of control to become large sums of money.
What happens if you cannot repay a payday loan?
In the previous example, say that the finance fee you need to pay to the lender is about $20. At the end of your loan period, you will owe your lender a sum of $220. If you are unable to pay the amount, you could find that the finance fee heightens to $30 or $40. This mean that for every day you delay your payment, the amount you need to pay back increases.
Are payday loans bad?
It is vital to repay a payday loan as soon as possible because the additional fees levied when you fail to pay on time are to expensive. The average Annual Percentage Rate (APR) of standard loans is about 7% while credit cards can have about 20% of APR. Payday loans, on the other hand, have an APR averaging as a high 400%. Although this paints a false picture because it is comparing apples to oranges. APR calculations were not designed for short term loans, and when payday loans are paid on time, the interest is really only about 20%.
Can payday loans hurt your credit score?
Standard credit reports rarely ever show short term loans like payday loans, so it is difficult to predict how it would influence the credit rating. Simply applying for a payday loan, in itself, shows lenders that your financial situation is strained, but most companies may not discriminate amongst types of loans. If your credit report does show payday loans, it is crucial to ensure that you payback the full amount as soon as possible so that you can prove to any other lenders that you are a responsible borrower. Defaulting on payday loans can severely harm your credit score and jeopardize future prospects of taking standard loans or mortgages. However, taking out a payday loan and paying it back on time will not hurt your credit score.
The alternatives to using payday loans
The high cost and expensive penalties associated with payday loans make it a very risky option for people who are already struggling financially. Here are a few alternatives to payday loans that offer a less risky from of borrowing.
- Payment plan with your creditors – if you are in debt, you may contact your creditors and try to negotiate a payment plan or some partial payments in good faith. You may even try to convince them to delay or lower a payment.
- Paycheck advance – an employer can grant your paycheck in advance, if you have built enough of mutual trust in the work place. As this is not a loan but an advance, there will be no interest involved. Make sure that you do not abuse this option.
- Personal unsecured installment loan – you may approach a financial institution to apply for a personal loan. Such loans can be paid back on a monthly basis and they have a fixed rate of interest. Here at Cashco Financial, we offer Flex Loans that are easy to qualify for and can be a substantial help to your financial situation.
- Retirement account withdrawal – if you are in dire need of cash, you may consider withdrawing some money from a retirement account. Although you are essentially borrowing from yourself, it comes with a number of consequences in the form of fees and taxes if you do not repay the money within 60 days.
- Credit Card Cash Advance – although credit card cash advances are not exactly the ideal option for borrowing, in some forms they can be cheaper than payday loans.
As it is the case with any form of borrowing, you need to make sure that you have understood the rules and fees beforehand. Remember to be very strict when it comes to paying back borrowed money and you will be able to build more financial stability in the long run.