Payday loans are sometimes harder to repay than a traditional loan, because the lender did not verify your ability to repay before lending you money. Payday lenders generally don't assess your debt-to-income ratio or take into account your other debts before granting you a loan. Payday loans come with exorbitant interest rates and fees that often make it very difficult to repay them. If you can't repay a payday loan, the account may be sent to a collection agency, damaging your credit.
This may not be an option for many people, especially those who lack savings and don't have a credit card. Some people in this predicament, especially those with bad credit or no credit, turn to payday loans. They are fast and have minimum borrowing requirements. But they are heavily regulated and illegal in some states, due to their very high fees and difficult exit strategy.
People who apply for payday loans are often caught in a continuous cycle. A payday loan creates the need for a second, which creates the need for a third party, and so on. Some desperate borrowers continually apply for payday loans when they can't catch up enough to pay off the original balance. Payday loans are fine, but since the interest rate they charge is quite high, those loans should be taken with that knowledge and repaid as quickly as possible.
If you used a credit card instead, even with the highest credit card rate available, you are paying less than a tenth of the amount of interest you would pay on a payday loan. Because of this, payday lenders tend to settle in areas populated by low-income workers and communities of color, that is, areas more vulnerable to predatory lending. Customers can use payday loans to cover emergencies, such as doctor visits or car problems, but most use the loans to cover utilities, rent, or other recurring monthly bills. The lender will require you to write a post-dated check to cover the loan plus the fee and tell you that the check will be cashed at the end of the loan period, usually two weeks.
In the United States, payday loan operators often operate from shop windows in low-income neighborhoods. These rules would provide an avenue for banks and credit unions to offer customers lower-cost installment loans. Taking out a new loan at a lower rate to pay off payday loan debt may work if you can qualify or if you have a loved one who will allow you to borrow. Payday lenders target financially challenged customers who don't qualify for credit cards or have very low credit limits, mostly due to past financial problems.
Start working on your approach today because you definitely want your payday loans paid off as soon as possible before they cost you even more money. Payday lenders use different methods to calculate interest rates, often demanding almost 400% on an annualized basis. Payday loans can be very tempting, especially for those who have no cash reserves and a credit history lower than sterling. They are usually available through payday lenders who operate in shop windows, but some now operate online as well.
Borrowers can easily get caught in a debt cycle, by applying for additional payday loans to pay off old ones, sinking deeper and deeper into financial quicksand. Use the calculator below to estimate monthly payments for a debt consolidation loan or alternative payday loan. .