Most people resort to unsecured cash advances to cover essentials like food, rent, a medical bill, or utilities. These are known as payday loans and they are often less than $1000. And while the name suggests that the credit facility is linked to your paycheck, some payday loan providers extend the service to individuals they are sure will pay back the money soon.
These loans usually have incredibly high-interest rates, going up to 40% or more. The customers of these companies usually have unfavorable credit ratings, and so don’t have any other access to cash to deal with urgent bills.
One of the reasons payday lenders charge high-interest rates is because of the high-risk nature of the customers they serve. However, if you have a good credit standing, you should never take out cash from payday companies. A better alternative is payaid which is exclusively available to Kiwis. It is a relatively cheaper payday advance option, as it gives you access to a portion of your salary at no interest. In this article, we tell you why payday loans are a bad idea. Keep reading to learn more.
Disadvantages of Payday Loans
1. Very Expensive
One reason you need to quit using payday loans is that they are prohibitively expensive. They charge an outrageous APR rate which might be as high as 398%. Even the most expensive credit cards will often have an APR of just 36%.
2. They are Financial Quicksand.
The majority of borrowers cannot repay the loan in two weeks, which is the typical repayment period for these types of facilities. When the time for repaying the loan comes, borrowers are forced to borrow elsewhere to pay the loans. This sinks them even deeper into debt.
3. Borrowing these loans is incredibly easy.
Payday loans require much less paperwork compared to credit card accounts and banks. This incredible ease of borrowing makes it very easy to access these loans, which can make you form a bad habit of taking them.
Also, unlike other types of loans, there is no going back once you have signed the papers and taken the money. That is because these loans do not come with a right of recession.
Some Payday Lenders will insist on the right to access your bank account
The reason payday lenders give for wanting this right of access is to ostensible save you from writing post-dated checks. However, if the loan is due and you haven’t paid, the lender will try repeatedly to withdraw the money. This often results in several overdraft charges that could amount to more than $35.
4. They can be ruthless collectors
If you fail to repay the loan, be ready for an avalanche of tactics that payday lenders use to push customers to recover their money. This includes threats, intimidations, and even late-night calls.
How to get out of a payday loan
So, you have realized that these loans are prohibitively expensive and you want to back out. So what are the ways of clawing yourself out of a payday loan? Unfortunately,
Start by quitting taking out any loans. Speak with the lender to see if they can work out a payment plan so you avoid late fees. Other options available to you are personal loans and other lower-interest debts, for example, payaid. Payaid does not have an interest. The only thing they charge is a 5% fee on the amount you have taken.
Taking another personal loan or another payday advance option indeed puts you into debt. However, the cost of the loan is much smaller compared to a payday loan.
Another thing to take the financial pressure off your chest is to sell the extra things you have. Facebook marketplace or eBay gives you an excellent forum to sell things you no longer need and raise the cash to offset these loans.
Avoiding Payday Loans in the first place
Before you fall into the temptation of taking out a payday loan, you need to think critically about it. Unless you have a real emergency, we advise holding on until your next payday. A credit card is a better option if you have a house emergency or an unexpected medical situation. A credit cash advance is another option. You may also approach your bank for a short-term loan.
Although these loans typically have higher interests, it is nothing compared to the rates charged by payday lenders.
Your boss may also be a good starting point. If you tell them your situation, chances are that they might be willing to arrange your paycheck earlier.
Payday loan alternatives
It is common to encounter financial problems once in a while. However, before you rush to take a payday loan, consider these alternatives.
Set a budget
Creating and following a budget is a sure way to avoid cash problems in the first place. A budget lets you track all your expenditures and also enables you to avoid buying things you don’t need. Another option is to use envelop the envelope method. This involves putting the money you will spend for two weeks in certain envelopes. Also, one way to spend less money is to use cash.
Create an emergency fund
There is no better way to free you from the yoke of payday loans than creating an emergency fund. It is like a savings account, and is created for unexpected times that require extra money. Emergencies may include a medical bill and when your car breaks down.
Now, kiwis can get a payday advance from payaid. Unlike typical payday loans, payaid does not charge you any interest. You are only charged 5% fees.
Payday loans may be instant sources of cash for people in all sorts of emergencies. However, these loans come with punitive interest rates. Also, given that they are easy to take, they are highly habit-forming. If you find that you rely too much on them, it is in your best interest to stay away from them.
A good alternative to payday loans is payaid. It’s an app that lets Kiwis take a part of their paycheck at no interest at all. Other things you can do include creating a budget and sticking to it, taking a personal loan, and creating an emergency fund.