Payday loans are the most expensive personal loans you can get, some companies charging as much as 400% APR (annual percentage rate) on their loans. Even in jurisdictions where payday loans are not allowed, some micro-lenders get around the regulations with “admin fees” or other nefarious hidden charges. Ensure you know the entire cost of the loan before you agree to them, consider these alternative loans and benefits, and avoid payday loans where you can.
Cost of a Payday Loan
No matter how they try to advertise their benefits, payday loans are expensive and they are very clever in disguising their costs. This is done in a number of ways, most of which are considered predatory by most financial regulators. Modifications to how payday loans are presented include name changes like, small loans, micro loans, etc. They also may present their fee structure differently. Look for these signs that your temporary loan is in fact a payday loan that will cost you double, triple or more. Ask for the exact APR on the loan. Most companies like to hide the cost of the loan by stating its only $20 for $200. Yet they do not market the fact that the 10% interest rate is over the two week borrowing period and compounds daily. So if you were unable to pay back the loan, the interest rate over a year would in fact be 260% per year (APR). There may also be fees associated with ‘rolling over’ your temporary loan into this longer period.
Most payday loans do not allow balloon payments, ensuring that you have “all or nothing” at the end of the term for payment or rollover. The repayment timeframe is also for short period, rarely stretching pass 30 days. If you see any of these conditions on your loan, you may be paying a lot more for the loan than you realize. Start looking for alternatives as described below.
Before getting a predatory loan with such high fees, consider every one of these alternatives, and then search out other solutions, avoiding payday loans if possible.
If you’re taking out a loan to pay off bills or consolidate debt, try working out a payment plan with your creditors, possibly extending payment terms, with an increase in interest if necessary but at a payment amount you can afford in a monthly payment amount.
Approach your employer for a personal loan or payday advance. Only borrow what you need and nothing more, as it will be deducted from your earnings on your next pay check putting you into the same potential situation.
Contact a consumer credit counseling service in your area. Most often they offer their services for free or at a nominal cost, but can often negotiate your debt payments on your behalf and securing one low monthly payment avoiding the need for further loans.
If you deal with a credit union or a bank see if they have overdraft protection, for those instances where you will need to borrow in between paydays without the high cost of a payday loan. A credit union may be more willing to loan its members a personal short term loan over a large financial institution.
Look for non-profit or governmental sources of loans that can help you out in certain circumstances such as food, shelter, and energy crisis. These can all ensure you do not get into the situation of taking an exorbitant payday loan.