Should you reconsider taking a payday loan?

On Behalf of | Aug 17, 2018 | Credit Card Debt, Debt Relief |

When you face financial hardship, it is natural to try to fix the issue as soon as possible. No one wants to suffer from financial stress and continuous worry.

You may be considering taking out a payday loan as a quick cure for this financial ailment. A payday loan is a way to secure short-term financing that does not require any sort of credit check. But is a payday loan really a good idea?

How does a payday loan work?

When you receive money from a payday loan, you basically receive a cash advance on your next paycheck. You will provide the payday lender with one of your pay stubs to show proof of income and then request the amount of money that you need to borrow.

You will most likely need a bank account where the funds will be electronically deposited after approval. The borrowed amount is expected to be paid back once you receive your next paycheck. Depending on the amount of the loan, it may take several paychecks to pay back the loan. When the agreed-upon payback date arrives, you are obligated to pay on the loan. The amount you need to pay back also includes any lender fees that they charge. If you are unable to pay off the loan, you can request an extension, but this usually means additional fees.

Defaulting on a payday loan would be very similar to defaulting on other unsecured debt such as a credit card. In this case, the lender may threaten check fraud or even criminal prosecution.

Why a payday loan is dangerous

Convenience usually comes with a cost, and a payday loan is no different. The cost, in this case, will be incurred with charges that can range from 15 to 30 percent of the loan amount. Although you may only have a payday loan for a short time, chances are that you will pay much more in interest with a payday loan than with a personal loan or a credit card cash advance. If you are unable to pay off the loan and repeatedly require extensions, you could pay as much as double the original loan amount or more as the fees pile up.

Alternatives to payday loans

The best way to avoid a payday loan is to set a budget that keeps you within your financial means. If you are experiencing continued financial trouble no matter what you do, then you may want to look into the possibility of bankruptcy. To many people, bankruptcy is a “fresh start” and is an attractive alternative to continued financial distress.

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