What is a payday loan?

  • Payday loans provide a quick influx of cash but should be considered as last resort options.
  • You can pay interest equal to 400% APR or more with quick loans.
  • Alternatives include local nonprofits, churches, family members and personal loans.
  • Read more about Personal Finance Insider’s loan coverage here.

Payday loans are advertised as fast and useful ways to get money to cover an unexpected expense. However, payday lenders can often use predation to get borrowers to accept loan terms that seriously damage their long-term financial health.

What is a quick loan?

A payday loan is a high-cost, short-term unsecured loan that has a principal that is part of your next paycheck. Payday loans are often for small amounts, usually $ 500 or less. Payday loans provide instant funds, come with extremely high interest rates and are usually based on your income.

Payday loans are usually repaid within two to four weeks and you can get them from a physical lender or online. Lenders usually do not carry out a complete credit check or take your ability to repay the loan into consideration.

Different states have different laws when it comes to payday loans; Some states ban payday loans altogether, while others limit the interest rates that lenders can charge.

You may be put in a situation where you feel you have to take out a high interest rate loan to cover an expensive medical bill or rent check, but you should try to avoid quick loans if at all possible.

With exorbitant interest rates, quick loans can end up costing more than you originally borrowed and can catch you in a debt cycle. In addition, payday lenders often target low-income minority communities and convince them to accept confusing loan terms.

What are the disadvantages of a quick loan?

What Are Alternatives To Quick Loans?

Local nonprofits, churches, family members, personal loans and even some credit cards are better options for emergency aid than payday loans, said Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending.

“What we have seen in states that do not have payday loans is that there are different resources to help people in emergencies or distress, but they are out in the market in states that have lending loans,” Aponte-Diaz said.

Before you are in a situation where you are staring down on a quick loan, you may want to consider building an emergency fund to cover three to six months of living expenses, if possible.

You can find personal loan alternatives to payday loans more with our lists of the best small personal loans and the best personal loans for bad credit.

Consider any alternatives you have to quick loans before you decide to get one as they are associated with a high risk.

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