Payday loans have extremely high interest rates – but is it still okay to get one? Find out the answer here.
Payday loans are short term loans with very high interest rates. In fact, the Consumer Financial Protection Bureau (CFPB) warns that payday loans typically charge an APR of around 400%. Unfortunately, since payday loan costs are usually represented as a fee you pay to borrow, many people don’t realize how high the effective interest rate is.
When you borrow money at such a high cost, it can be nearly impossible to pay off what you owe and stay out of debt. If you take out a $100 loan with a $30 fee and have to repay $130 the next payday, you may have a hard time finding the money. And if you To do pay it back, you may run out of money before you get your next paycheck, which will force you to take out another payday loan.
Due to the huge expense and short repayment period of payday loans, many people end up having to take out another payday loan to pay off their original loan on time. This can happen over and over again, until you get trapped in a cycle where you almost constantly have at least one payday loan.
Obviously, all this means that taking out a personal loan is very bad for your finances. Indeed, the decision to take out a personal loan can have financial consequences that reverberate throughout your life for months and even put you on the road to bankruptcy if you fail to break the cycle of loan.
That said, you might be wondering if there are any circumstances when it’s okay to take out a payday loan. This guide will help you decide.
Explore all your other alternatives before taking out a payday loan
Before you even consider a payday loan, you should explore all other alternatives first, as almost any other type of borrowing will likely end up costing you less than a payday loan. Some of the other types of financing you should consider include:
- Alternative payday loans: These are short-term loans available to members of credit unions who need quick access to small amounts of money. Fees are capped and you are limited in the number of alternative payday loans you can take out per year. These loans are much more affordable and a much better way to borrow than payday loans if you have a short-term financial need.
- Credit card: If you can use a credit card to pay for essential purchases instead of a payday loan, you’re better off. In most cases, this is true even if you end up having to take a cash advance on your credit card – although cash advances come with higher fees and a higher APR than standard purchases. on most maps. It’s true that interest on credit cards is very expensive, but the interest you’ll pay on a card isn’t even close to what you’d pay on most payday loans.
- Personal loans: Personal loans have lower interest rates in most situations than payday loans or credit cards, and they can also provide a set repayment schedule. If you can repay your personal loan on a fixed schedule with an affordable monthly payment, that’s much better than having to take out payday loans repeatedly. It can also be better than being stuck with credit card debt at a higher interest rate that you could pay for decades if you only pay the minimum.
You should also consider borrowing from friends and family, selling items you don’t really need, temporarily taking on a side hustle, and exploring all other possible sources of finance before taking out a loan. on salary. For example, if you think you need a payday loan to cover an essential medical bill when you take your sick child to the doctor, you should first ask your care provider if you might qualify for a payment.
What if you have exhausted all other alternatives?
If you have absolutely no other way to raise money and it’s absolutely imperative that you have cash available, a payday loan might be your best and only option. But you should go into the transaction with your eyes wide open and be aware of the dire financial situation you are in.
Payday loans should not be used to cover things that aren’t real emergencies. For example, if you need a personal loan to cover a car repair because you absolutely must have a vehicle or risk losing your job, it may be a good idea to take out a personal loan. Yes, it will temporarily worsen your financial situation, but the consequences will not be as severe as losing your job might be.
However, you have to ask yourself if a payday loan will really provide a long-term solution or if you are just postponing bigger problems. If you’re about to be evicted and are considering a payday loan to pay your rent, ask yourself if the loan will actually help you keep your house. If your payday loan could cover your rent for one month, but you still couldn’t cover the rent the next month, you’d find yourself evicted anyway – and then you’d be without your house. and deeper in debt. As long as you have somewhere else to go, taking the payday loan might not be worth the one-month reprieve.
Payday loans are still a bad way to borrow
To recap: the only situation where this kind of borrowing can make sense is if you have no other alternative, a payday loan is the only way to avoid a worse financial disaster, and you’re not just delaying the inevitable with a payday loan. . In all other situations, you should look for a more affordable financing solution – or skip the borrowing period if you can’t find a cost-effective way to do so and debt will only make your finances worse in the long run.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.