Life happens, which means sometimes you need cash fast, and you just don’t have it. Whether you need to pay for an emergency root canal or have unexpected home repairs, sometimes life just doesn’t wait for your next paycheck.
If you’ve spent some quality time researching how to access cash quickly, you might think that online payday loans are the answer. Lenders that offer payday loans typically promise you things like quick applications, no credit checks, and expedited approvals. They say you’ll get the cold hard cash you need the very next day. It’s an easy solution, and hey, what could possibly go wrong?
It turns out, a lot can go wrong when you sign on for these get-cash-fast loans. The main problem is that many of these online payday loans charge extremely high interest rates and fees just so you can borrow a small amount of money over a short timeframe.
That can quickly lead to situations where you end up getting behind on the loan and have to borrow more and more in order to pay it back. Soon you’re in a hole so deep you won’t know how to get out. It can be costly, greatly damage your credit, or even lead you to bankruptcy.
Here are some of the downsides of borrowing through payday loans, and an alternative that can get you the money you need without putting you in a risky financial position.
What are Online Payday Loans?
Payday loans are known for being quick ways to borrow against future income but at a very high price. When you go to your local check-cashing place or an online payday lender to take out a payday loan, you might pay over 300% APR on that loan.
In fact, a Consumerist study found that the average APR on payday loans was 339%. That’s a hefty fee just to access some last-minute cash.
And you’ll probably have to pay the loan back a month later. If your APR is 300%, you’re not necessarily charged 300% interest on your loan. You would only pay 300% if you paid the loan off over a whole year, because the APR is what you would be charged in interest over 12 months.
However, if you only borrow money for one month, you’d have to pay 1/12 of 300%. So every month you’d get charged an interest rate of 25% if your APR was 300%. If you take $500 out at that APR, and you pay the loan back a month later, you’d be charged a fee of $125.
Why it’s Best to Avoid Payday Lending
Other than the possibility that you can get money quickly if you have bad credit, there aren’t many benefits associated with payday loans. You’ll end up paying a significant amount in interest, and you’re usually expected to pay the money back within 30 to 90 days if you’re getting a payday loan. With these fast cash type loans, you have to pay the money back anywhere from two months to a year after taking out the loan.
The interest on your loan can also compound daily, weekly, or monthly. This means that interest charges will start accumulating on the interest you already owe, which will inflate your loan balance.
Depending on how much you borrowed and your financial situation, compounding interest can make it incredibly difficult for you to pay back the loan. Many times borrowers end up taking out additional loans to pay off the payday loan, which can lock them into a seemingly endless cycle of debt.
You’re also unlikely to be able to borrow a large amount of money because payday and fast cash loan lenders have low maximum borrowing amounts.
In addition, you won’t be building your credit if you pay the loan back on time, because most of these lenders don’t report your behavior back to credit bureaus. In contrast, above-board lenders will report back to credit bureaus when you’re paying your bills on time and in full, and that can boost your credit score.
Why Personal Loans are a Safer Alternative to Payday Loans
When it comes to borrowing money, you’re better off getting a personal loan than a payday loan. A personal loan will likely cost you less money in the long run. And if you’re worried you won’t get the money in time, you can rest easy. There are several legitimate online personal loan lenders that can process your application quickly and even get you the money you need in a matter of days.
Unlike payday loans, you have to go through a credit check to qualify for a personal loan. However, if you have a steady income and meet the lenders’ eligibility requirements, you’re likely to qualify for a lower interest rate than you would if you used an online payday loan.
Your repayment timeline will be much less stressful if you opt for a personal loan. Personal loans come with the option of longer-term lengths; you can pay your personal loan off over a few years instead of a few months.
And because you can pay your loan off over a longer term, your monthly payments can be very manageable. There also tend to be fewer fees attached to personal loans, and you might be able to borrow more because personal loans have higher loan maximums.
Personal loans aren’t much more difficult to apply for than payday or fast cash loans. You can typically get pre-qualified online by answering a few easy questions about your income, financial history, and occupation.
If you’re worried you don’t have enough time to wait for a personal loan approval, you might be surprised to learn that with many lenders you can get approved within a few hours and get money in a matter of days.
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