3 Reasons You Should Avoid Payday Loans
Like the Plague
Emergencies, by their very nature, seldom announce when they will bedevil us. Whether it is a sickness, your car breaking down, or a sudden demise in the family, they come when we are least prepared. This can push you to seek out a loan to fix the problem.
Sensing this need for help, payday lenders have sprung up almost on cue. They attract clients with their promise of same-day cash to solve your financial emergency. Tempting as they are, relying on these loans is a bad idea. Firstly, the loans attract outrageous interest rates and have some very costly fees. Instead of these loans, you may want to try other options like personal loans or credit cards. And for kiwis, a never-before-seen solution is turning heads everywhere. Called payaid, it allows you to take a small part of your paycheck in advance. The difference between this payday advance option and normal payday loans is that it is interest-free. In this article, we tell you why you should avoid payday loans like the plague.
1. Payday Loans Charge Exorbitant Interest Rates
Payday loans charge prohibitively high-interest rates. It’s way higher than credit cards and personal loans. Most of these lenders set fees for every $100 that you borrow. They can charge as much as $30 per $100. It means that, if you took out a $100 payday loan, you need to pay $140 by your next paycheck. And although it might appear as though the interest rate is only 15%, you will realize that it is equivalent to 390% when you work it out. Even the most expensive credit cards pale in comparison.
And although payday loans are intended to fix a short-term problem that requires cash urgently, the truth is that given their quick turnaround times and the interest of the loan, most people end up renewing the loan as they cannot pay the entire amount.
The majority of borrowers decide to renew the loans instead of defaulting. Some people renew the loans to the point that the fees they pay equal the principal amount they borrowed.
2. Payday Lenders Charge Costly Fees
Another reason why we strongly advise against getting into the habit of taking out payday loans is that these facilities charge incredibly high fees. Due to the ultra-short turnaround times, borrowers fail to repay the loan, and so it rolls over. When that happens, the borrower is left with two options. The first option is to default and be at the risk of being sent to collections. The other option is to pay an extra fee to have the loan rolled over for an additional two weeks. These fees are so costly and are our second reason for avoiding payday loans.
Upon renewal of the loan, payday lenders will assess a fee over and above the balance that is outstanding. For example, if you borrow $100 at an interest rate of 15%, this turns into a $115 loan. When you renew it after being unable to offset it at your next payday, you will owe $130 excluding the renewal fees.
What began as a quick fix and a harmless debt can escalate quickly because of the accumulating fees. And it will become more difficult to pay off if the loan amount increases. This leaves you with no option but to keep on renewing it and piling more debt.
If you fail to pay back the loan completely, you will find yourself in an endless cycle as the lender continues carrying their loan over. They may also take another similar loan from a different lender to clear an existing one.
3. There are lots of more affordable options
Many people may not be aware, but payday loans aren’t the only fix for emergencies. Even if you find yourself needing cash now, we advise considering other options.
The first option is payaid. It is a new app currently only available to New Zealanders. Working similarly to payday loans, this type of loan enables you to take out a part of your paycheck to fix a pressing problem.
However, unlike payday loans, it is completely interest-free. The only fee you are charged is 5% of the amount borrowed.
Another option is to ask your payday lender to extend the due date. Call the lender if you suspect that you may be unable to repay the loan on time and inform them as early as possible. You may be surprised how some lenders are willing to come up with a repayment arrangement that enables you to pay smaller instalments until you clear the loan.
You may also want to talk to your employer to give you an advance on your paycheck. This option is especially encouraged if the company you work for is a small one with flexible policies. They may be willing to listen to you and extend a payday advance. This works the same way as a payday loan, only that it does not have those excessive fees. But the advantage of this option is that it will mean you have a smaller paycheck next time.
Another way to acquire short term loans is by borrowing from close friends and family members. And while there may be pride issues when you decide to ask family and friends to help you, it is still way cheaper than going the payday route. Just make sure you pay back the loan as agreed. Otherwise, it may hurt lifelong relationships. Therefore, if you go the path of borrowing from friends or family, show the same seriousness you would if you had been dealing with a business lender or bank.
Payday loans are deemed as a quick fix for urgent financial problems. However, these loans are accompanied by punitive interest rates, have costly fees, and can plunge you into an unending cycle of debts.
Instead of payday loans, we advise borrowing from family and friends, talking to your employer for a payday advance, and exploring other options like payaid. These are way cheaper than payday loans.