A payday loan is a high-cost, short-term loan. Payday loans are considered by some states to be “predatory” in nature, so you should educate yourself about alternatives before taking a payday loan.
What Is a Payday Loan?
A payday loan is typically a small loan—less than $500—that is intended to be paid in full within two weeks, which is usually when a borrower would receive their next paycheck.
It sounds like a great deal until you know the facts.
Facts About Payday Loans
No credit check required
Unsecured loan
$10-$30 flat fee per $100
Late fees apply
How Does a Payday Loan Work?
You may look at the facts and wonder why anyone would think payday loans are predatory. Once you understand how they work, the risks will become clear.
No credit check required
Because the lending institution does not check your credit, they do not know if you have the financial resources to pay back the loan at the specified time. Some argue that predatory lenders are banking on the prediction that borrowers can’t pay, which will allow them to charge late fees that will compound over time.
Unsecured loan
Because the loan is unsecured, borrowers can easily overextend themselves without losing physical property. For that reason, they are more likely to allow late fees to accrue without recognizing the actual costs. So what sounds like a generous provision on the part of the lender is really a tactic to let fees compound without notice.
$10-$30 flat fee per $100
Payday lenders advertise a flat fee instead of an APR, or annual percentage rate, for payday loans. Thus, it becomes nearly impossible to compare the flat rate on a payday loan with the APR on a personal loan.
Let’s look at an example:
Loan Amount$500
Fee/$100$20 ($100)
Term2 weeks
Total$600
The actual cost of this loan, $600, is the equivalent of 521.43% APR. No one would advertise that.
Late fees apply
Late fees on payday loans are often exorbitant. They are added to the principal of the loan, and the cycle repeats.
If our previous borrower failed to pay the $600 balance in full at the end of the two-week term, they may be charged a $25 late fee. Now, their principal amount is $625. So, they are charged the standard $20 fee per $100 on $625, which comes to a total $775 in just four weeks.
Loan Amount$625
Fee/$100$20 ($150)
Term4 weeks
Total$775
If they miss the due date again, and it is likely they will, the payback total would come to $960.
Alternatives to a Payday Loan
Now that you know the pitfalls of a payday loan, what are your alternatives if you find yourself in need of cash quickly?
Borrow Money From a Family Member or Friend.
Loved ones won’t likely charge you interest on a short-term loan if you are trustworthy and responsible.
Reach Out to a Community of Religious Organizations.
Many municipalities have programs to help people pay their necessary expenses when needs arise. If your hardship was caused by a natural disaster or other catastrophic event, there may also be state and federal resources available. Religious organizations are often willing to assist, as well.
Get a Personal Loan from a Reputable Lender.
When comparing actual APR, a personal loan will have a significantly lower interest rate than a payday loan. Local banks and credit unions, as well as online lenders, are usually more willing to approve personal loan applicants with little or no credit history, including those with low credit scores.
Should You Get a Payday Loan?
The choice to take out a payday loan is ultimately up to you. Knowing the facts and their repercussions will make you an informed and conscientious borrower no matter what type of loan you choose.
If you still have questions about payday or personal loans, schedule an appointment with the loan experts at AMG Finance. We are here to help you prosper.
