If you need cash fast sometimes a quick fix, like a payday loan, might seem like the only option.
But, as simple as easy as these loans are to get, they can lead to real problems down the road.
Yet each year around 12 million Americans turn to payday loans to help pay for emergency situations.
The question is … are payday loans bad?
Keep reading for a closer look at payday loans and why you might want to steer clear of this dangerous financial product.
How Payday Loans Work
Rather than filling out a detailed application and waiting for a credit check, payday loans require little more than the confirmation that you are alive, breathing, and earn a regular paycheck.
To get your money, you typically need to provide the lender with a signed check for the amount your borrowing plus interest or give them direct electronic access to your bank account.
When you’re paid again, the payday lender will take the funds right out of your bank account.
You may be able to delay the withdrawal to another payday, but will be charged again for additional interest.
Who Uses Payday Loans?
While just about anyone can get a payday loan, these types of loans typically appeal to borrowers who are just barely making ends meet financially. Unfortunately, payday lenders are very much aware of this and market their services in lower-income areas.
Are Payday Loans Bad?
So, the question is … just how bad are payday loans?
If these types of loans are so easy to get and are largely going to people who are already struggling financially, are they really that bad?
One problem with these loans is the huge fees attached to them.
Even if you only want to borrow $200 to $300 dollars, you will probably still pay a fee of at least $50. That’s a big chunk of change for the amount being borrowed.
Wild Interest Rates
Most payday loans also come with interest rates of 10% to 20%.
That may not sound like much compared to most credit cards, but the interest on credit cards is calculated over the course of a year. A two-week payday loan with an interest rate of 10% comes out to 260% interest per year!
Payday Loan Alternatives
Payday loans are a dangerous cycle that many borrowers get trapped in. They’re unable to pay the loan and continue taking out more loans to cover other expenses.
Here are a few alternatives to payday loans:
- Credit cards
- Loans from family or friends
- Negotiate payment terms with the bill collector
While none of these solutions are perfect, they’re all almost always better than a payday loan. Check BonsaiFinance for more useful payday loan alternatives.
So, are payday loans bad?
In almost all circumstances payday loans are a bad idea. The terms are terrible and payday lenders often knowingly prey on the financially vulnerable.
Check out the rest of our articles for more on managing your personal finances.