When you're short on cash, the idea of getting a quick and easy payday loan might seem like a great way to get out of a tight spot. And for some people, this type of loan is their only option. However, after many years of these short term loans being made available to the public, there have been very few cases where the transaction turned out to be something that was actually beneficial to the borrower. Before you decide to try to get one of these loans there are a few things you need to know about them.
The Annual Percentage Rate (APR)
You've probably seen the acronym APR on some of the paperwork associated with a credit card or some other form of credit. This is the the finance charge for the loan. It is the amount of money you will pay to use their money until you pay it back. The cost of the APR on a payday loan can be as much as 400% of the amount you've borrowed. For example, if you borrow $100 on a typical two-week loan, your APR could range anywhere from $10 to $40. This is the amount you will have to pay in addition to the borrowed amount. If you choose to take out this type of loan it is important that you check the APR before you agree to the loan and make sure that you can afford it.
Dangers of Payday Loans
Aside from the high finance charges, these types of loans can actually complicate an already difficult problem. If you're in dire straits then taking on a loan with such a high interest rate will almost inevitably be difficult to pay back. At best, they only represent a highly expensive temporary fix for the problem. In a worst case scenario, you won't be able to pay back the money borrowed and you'll not only have to pay exorbitant late fees but you'll have overdraft charges from your bank added on to your already strained budget as well. This in turn will lead to getting reported to agencies like ChexSystems that can prevent you from writing checks anywhere in the future.
Alternatives to Payday Loans
Payday loans are more likely to be used by those with a poor credit rating. That is why, if you're resorting to this kind of solution, it may be time to take steps on improving your credit. You can do this by getting a cosigner for a loan and working to rebuild your financial reputation. You can also negotiate a payment plan with your lenders or ask for overdraft protection from your bank. It may be difficult for many to find a solution when they are in a financial bind and many of the possible avenues you can take may not be as easy as the payday loan, but they are far less risky and can put you in a much better position financially in the end.
No one wants to find themselves in debt without the money to pay their bills, but there are times when that can happen. By checking out the payday loan industry carefully, you can take the necessary steps to ensure that you're not doing more damage than you would be helping yourself.