Although the government is doing all it can to crackdown on payday loans, it’s not the case that payday loans have ceased to be. Whilst the government intervention to set a maximum APR for these companies is a great first step, public education is still the missing step.
Payday loans are a specific type of short-term loan that have been increasingly criticized for their high interest rates and their providers’ targeting of vulnerable people who they know will be unable to pay back the loans.
We, just like the government, back the position that unless there’s no alternative option, you should avoid payday loans wherever you can. And, as you can see in that linked article, there is almost always an alternative.
So with that in mind, we’ve created this guide to help you know what to look for when you’re trying to identify a payday loan from other sorts of short-term loans, and to help you understand what makes them so bad.
Fees that You Never Knew Existed
One of the worst things about payday loans – when you compare them to other forms of short-term loan is that there are, generally speaking, hidden fees that you never knew about.
The fees that lenders attach to the amount of money you have borrowed is on top of the interest that you already know about (our next point), and so you won’t have calculated whether you can afford your payday loan with these extra fees in mind.
Therefore, you should always make sure you know what you’re getting yourself into contractually speaking by reading the fine print of the loan agreement before you sign. This is the only way you can guarantee you understand now much you’ll have to payback and when.
Interest Rates You Won’t Find anywhere Else
And, to be clear, not in a good way!! It’s certainly normal for loan providers to charge interest. However, the amount of interest paid back on payday loans can be as high as 1,000%. Of course, the idea is that payday loans are paid back in full on the day you get paid, but this rarely happens because payday loans are targeted specifically at people who are likely going to struggle to pay back what they’ve borrowed.
Again, this all goes back to understanding the consequences of borrowing via a payday loan. If you’ve read the small print and understand precisely what you’ll need to pay back and you’ve exhausted all other options, then take out a payday loan. Just really make sure you know what you’re getting yourself into.
An Unbending Payback Schedule
One of the things that could be perceived as a strength of a payday loan is the payback schedule. In essence, whatever the sum of money that you borrow is, you should be paying it back on the day you get paid (thus the title “payday loan”). However, this means that payday loans are extremely inflexible, and according to this article by Different Money, different from other short-term loans that facilitate payback over a small number of months.
Perhaps you could argue that the deadlines are so inflexible because the lenders want to make it as easy as possible for you to miss your repayment day so that you accrue interest. This is a cynical view, but one that mirrors what seems to be happening, where people take out these payday loans and then are unable to pay back the full amount (perhaps because of the additional, unknown charges) and so are forced to pay the extremely high interest rates, as mentioned earlier.
Ultimately then, payday loans are well worth staying away from if you can. If you really do need to find some extra cash, there are other types of short-term loan that you can find that have less severe and punishing repayment schedules, and that have lower interest rates. So now you know what a payday loan is, it’s best to stay clear of them.
Jayson @ Monster Piggy Bank says
I completely agree. Payday loans are trap and ways to put you in debt. Each has tactics that are hard to get out of. I hope people reading your article would know what you are implying especially on “Interest Rates You Won’t Find anywhere Else”.
moneystepper says
Indeed Jayson! I’ve made a small edit to the post to make sure that this title isn’t misleading. Clearly, the terrible interest rates (that are so high that you can’t find them elsewhere) makes it essential that individuals avoid payday loans at all costs!
Nina @ RichLife.io says
The only people I know taking these are those that have the least possible buffer to ever shoulder the consequences of them. It’s why I keep hammering on to friends who consider these that they should work on that emergency funds right now and not be afraid to use it. Let’s face it, if times are that dire, you are having an emergency going!
moneystepper says
The “success” of the payday loan (in my opinion) has more to do with people in today’s society craving convenience and instant gratification rather than the fact that the economy have pushed people into an unreturnable situation where the only solution is the payday loan. The government need to launch a huge program of education (starting in our schools) so that everyone understands the financial and social consequences of taking out these loans.
Money Beagle says
The biggest issue is that it sets up a cycle that is very hard to get out of. Very rare is it that you would be able to take one loan, pay it back quickly, and never worry about another one. Maybe that does happen, but what often happens is that it’s just a quick fix that gets you through to a certain point, but within a short period of time, you’re right back in the same position. If you rely on payday loans in that situation, you’re almost certainly doomed.
moneystepper says
In researching this article, I tried to find a statistic showing how many people repaid a payday loan on time. Unsurprisingly, this isn’t a figure that any payday loan company publishes. I think this omission in reporting probably tells you exactly right you are! Avoid payday loans or you will end up in this cycle of rapidly increasing debt which is really not easy to get out of!
David Carlson says
I agree 100% with your thoughts on payday loans. They can seriously crush some people’s finances. Then again, the target market is people who don’t have much money to start with so bankrupt is sometimes imminent for them.
Alexis says
I would never use payday loans because it simply seems like too much of a scam for me.