What Is A Payday Loan?
The basic idea behind a payday loan sounds reasonable enough.
You can borrow small amounts like $100, pay around $15 in interest, and only pay back the payday loan when you receive your next salary.
Also, there is usually no credit check and you can get approved within minutes, often before your lunch break is over.
Now here’s the catch. That $15 you’ll be charged for borrowing $100 for just two weeks is the equivalent of paying an APR of 400%.
By comparison, a credit card with a high APR may be priced at 29% or less.
High interest rates are just one of the things that make payday loans so dangerous.
Why Is A Payday Loan Such A Bad Option?
A payday loan is probably the most expensive way to borrow money - and some customers never break free from the cycle of debt that these loans trap them in.
Say you took out a $100 loan with $115 payable on your next payday.
- What payday loan companies don’t always tell you upfront is that if you fail to pay you’ll be liable for high fees and penalties.
- They may also give you the option of rolling your payment over for another two weeks or even a month - for a fee of course.
- Before long, your $115 payment will increase to $130, then $150, then $200...and before long you may end up owing the payday loan company hundreds or even thousands of dollars.
Payday loan companies are notorious for using strongarm debt collection tactics that sometimes cross the line between collection and harassment.
It’s best to avoid this trap altogether.
How Can Bad Credit Borrowers Avoid This Debt Trap?
Payday loans offer a quick solution for those times when people need small amounts of cash in a hurry. Unfortunately, the subsequent debt trap they create makes them extremely risky.
Here are some things you can try instead:
- Budget effectively - Most people can free up $100 or more in their monthly budget by cutting out unnecessary expenses.
- Boost your income - You may want to work a few extra hours a week, find a part-time job, or explore some work from home alternatives to increase your income.
- Build up an emergency fund - You can start with $100 and gradually increase it until you have $500-$1000 in savings for emergencies.
Having your own cash reserve is always better than relying on payday loans.
If you do need to borrow some cash, there are more affordable options out there than payday loans.
What Alternative Lending Options Should Bad Credit Borrowers Explore?
Sometimes there’s no avoiding the fact that you need to borrow a small amount of money.
Here are some alternatives to payday loans that will cost you a lot less:
- Extend your existing repayment dates - You can ask your credit card or loan provider to extend your payment date by a few weeks - ideally until after you get paid. This will free up some much-needed cash.
- Ask your employer for an advance - Some companies will be willing to give you a salary advance and deduct the amount from your next salary. This is like a payday loan without the interest and the risk of a debt trap.
- Approach a close friend or relative - Nobody likes to ask for financial help but sometimes a small loan from someone you know well can be a great help. It’s a good idea to repay it as quick as possible though to avoid any potential disagreements from arising.
All of the options listed above are more affordable and a lot safer than dealing with a payday loan company.
Key Takeaways
Payday loans seem to be an easy solution when you’re short of cash - but they can turn into huge debts that create immense stress and cost you a small fortune.
Budgeting effectively, building up an emergency fund, and exploring better lending options like a salary advance, payment extension or small loan from a friend or relative are all better options than a payday loan.
We recommend that you avoid these loans completely to stay away from the trap that they lay out for less cautious borrowers.
