If you’re short on cash, payday loans may be an option for you. But be wary – these loans tend to have high costs and can become a debt trap for many borrowers.
Payday loans, also referred to as cash advance or deferred deposit loans, are unsecured short-term financial solutions that can be used for unexpected expenses or regular bills. They’re typically due on your next paycheck along with interest and fees.
Payday lenders don’t report to the credit bureaus
Payday loans differ from traditional credit cards in that they don’t do a credit check. This gives borrowers access to fast money at exorbitant interest rates, creating an almost impossible debt trap to escape.
However, a payday loan can have an adverse effect on your credit score if you fail to make payments as promised. A lender who reports late payments to the credit bureaus or sells your debt to a collections agency may further lower your score.
In the United States, three major credit reporting agencies – TransUnion, Equifax and Experian – compile your credit report. This data reflects your borrowing history as well as past payment behaviors.
Negative items on your credit report can be removed by disputing them with the relevant company. For instance, you could dispute a charge on your card that doesn’t belong to you, or ask to have an old bankruptcy or judgment removed from your record.
They charge high interest
Payday loans can provide temporary financial relief, but they may not always be the best solution. They typically come with high interest rates and hidden charges that add up quickly.
If you need money quickly, there are cheaper and easier alternatives to payday loans that may be less costly and easier to repay. One possibility is asking a friend or family member for a loan.
Another option is credit counseling. There are countless non-profit agencies around the country that offer free or low-cost credit advice and tips on managing debt.
Consider reaching out to local charities or churches for funding assistance. These groups tend to have more accommodating loan terms than larger banks or credit unions.
They don’t offer payment plans
Contrary to popular belief, not all payday loans are created equal. Most are short-term and only involve small amounts, with high interest rates attached.
While payday loans can be useful in times of emergency, they also often lead to an unhealthy debt cycle that spirals out of control. To avoid becoming embroiled in a payday loan nightmare, it’s important to understand what you’re signing up for and make wise budgeting choices.
A repeating payment, also known as a continuous payment authority (CPA), can cause more problems than it solves. A CPA allows your lender to deplete your bank account on an irregular basis but may also lead to fees or even bank charge-offs from your bank.
Overall, payday loans are a lucrative source of revenue for lenders who remain in business and they can provide much-needed financial stability to some struggling families. To avoid costly mistakes with payday loans, it’s important to understand your obligations and strive to improve your credit score.
They are illegal in some states
Payday loans are small, short-term cash advances made in anticipation of a borrower’s upcoming payday or income from another source such as a pension, Social Security or insurance award.
Typically, you repay a payday loan by writing a post-dated check or giving the lender permission to electronically debit your bank, credit union or prepaid card account. Failure to do so could result in fees, overdraft charges, bounced checks and possibly collections fees or court costs being applied against you.
Many states have laws that set limits on how much money can be borrowed and for how long. Furthermore, these statutes specify a maximum interest rate and finance charge that may be charged.
Eleven states and the District of Columbia do not regulate payday lending, or limit it to comply with interest rate caps on consumer loans. On the other hand, 37 other states have specific statutory provisions which permit payday lending.