Payday Loans- Risks V/S Rewards
With mid-month financial crunch, turning towards family might be an alternative but not always. Payday loans are short-term loans (mostly 2-3 weeks) lending small amounts nearly around $500 bridging the gaps between paychecks. These can be expensive due to high APR (Annual percentage rate). For instance, a $15 fee is charged on a $100 advance for two weeks which can amount to a 400% APR. These loans have generally state regulations applied. APR may seems to be high, but it’s a false picture because its like comparing apples and oranges, if you pay your loan back on time it costs almost around 20% APR which when compared to credit card loans being around 17% doesn’t seem to be expensive. The borrower generally writes a post-dated cheque including the fees involved or an authorization to electronically debit when the due date comes. There are a lot of online platforms through which you can take up payday loans for example Lendup, MoneyKey, Wonga etc. or go to a store payday lender nearby.
With that in mind, here are a few pros and cons of payday loans you should consider while deciding to take up payday loans:
A) Payday loans are convenient: In comparison to bank loans where you need to go through various compliances, here, one only needs a proof of income, a government authorized ID and an account where money can be transferred. There are high chances of approval of the payday loan within an hour.
B) Payday loans ignore a persons credithistory: These loan does not require a credit note. If your credit is damaged or you have not established your credit rating yet you would still be eligible for payday loans.
C) It can save you from overdue payment fee: If you have overdue bills which are accumulating fees payday loans can temporarily help you repay them and avoid having black marks on your credit reports.
A) Payday loans can be expensive: The loans are generally of fewer amounts with a prompt pay back time but with a very high APR (annual percentage rate), Which if paid on time would not cost more than 20% but if rolled over a few times can cost you to pay20%+4% each month. And that does not even include late fees. A lender can charge you as high as $7 per day for delayed payment.
B) Direct Debit for Repayment: Your payday lender will debit directly as soon as your income for the next month arrives in your account. Your money is gone even before you have paid for food or rent. If you cannot afford that then make sure you cancel the direct debit option and come up with a different repayment options.
C) You borrow again to repay the loan: It's a debt trap. You are always tempted to borrow again to repay the previous loan. It gets difficult to get out as with each repayment your amount increases and if you fail to repay the loan you might as well affect your credit rating.
IS PAYDAY LOANS RIGHT FOR YOU?
If you think you have the ability to pay back on time, payday loans can be a quick and easy option for instant cash but if you know you are in a financial crunch, you might as well, should think of other options like:
1) Ask for an advanced paycheck: If you have a good mutual trust at your workplace, you can ask for an advanced cheque from your employer. But do not try to abuse that option.
2) Emergency Assistance : Various community organizations help in emergency financial assistance. One can always go and ask for help.
3) Personal installment loan : Approaching a financial institutionor a credit union for a personal loan. It can be paid on a monthly basis with a fixed rate of interest.
4) Get a side job : Offer your skills or Hobby in return for cash.
With all said, make sure you know what you are getting into (their rules and fees beforehand). Always make a repayment schedule and be strict on yourself to follow it. It will help you in building your financial stability.