Payday loans can seem like a quick solution when you need money. If you are short on cash to make a purchase, if you need funds to pay a bill or if you’re looking for some extra money to hold you over until pay day, you might be tempted to turn to a payday loan.
Many people turn to payday loans because they’re convenient. You can get one just about anywhere, payday lenders don’t usually do a credit check, and you get the money quickly. While this seems very convenient, the truth is that payday loans often cause more problems than they solve.
A lot of people choose payday loans when they need help financially. They may need a bit extra for a birthday gift or holiday shopping. They might need to borrow cash to pay their credit card bill or make sure they are able to make rent. Those who get payday loans often believe that they are being financially responsible by doing so. They’d rather not miss a bill or pay back a debt late. They have good intentions. However, these good intentions can get them into trouble.
How? Because interest rates are high, payday loans can be very expensive and the costs of getting them add up very quickly.
The High Cost of Payday Loans
Consider this: At most payday lenders, it costs about $20 to borrow $100 for two weeks. That’s 20% in two weeks or 520% annually! Compare this to a credit card that generally has an interest rate of about 20% annually, and it’s easy to see how the costs of payday loans can add up.
Of course, the idea is not to borrow money from a payday lender for a year. When most people take out a payday loan, they assume that they’ll be able to pay back the loan in two weeks and pay about $20 for the convenience. However, the truth of the matter is that this doesn’t happen very often.
Think of it this way: If you need to borrow a one hundred or two hundred dollars to make a purchase, pay bills or make ends meet, you obviously do not have any savings or emergency fund built up. This means that you’re spending all of your income on expenses and bills. Since this is the case, you’re not likely to have an extra $100 sitting around in two weeks that isn’t accounted for. You’ll likely have spent your money on expenses and bills, leaving you with nothing left to repay your payday loan.
Even if you do have the money in two weeks, the fact that you needed to get a payday loan in the first place is a red flag. For many people, payday loans are a band-aid solution. They don’t actually solve the root problem. Instead, they temporarily cover up the issue. The truth is that, if you need to get a payday loan, you’re probably in a shaky place financially.
You could be one emergency or one job loss away from being unable to pay your expenses and meet your financial commitments. This could lead to you taking out another payday loan and another until you’re unable to pay these loans back. If this happens, the interest costs will add up very quickly and you’ll end up owing significantly more money than you currently do.
Alternatives to Payday Loans
If you are having financial trouble and you are unable to pay your expenses and your bills as they become due, you may want to speak with a licensed insolvency trustee. This is a person who has been registered and licensed by the federal government to review financial situations and inform people of the options that are available to them. Most trustees offer the initial consultation at no charge, so you will be able to have a trustee review your situation without it costing you any money.
Once you have more information on the available options, you can make an informed decision for your financial future. Meeting with a trustee can help you solve the root problems that are causing you to end up taking out payday loans. This meeting can help set you on a path where you can rebuild your financial life and put yourself in a better situation for the future.