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.