Good payday loans can be convenient and provide fast access to funds you need, but they may come with high fees or other pitfalls that make them difficult to repay.
If you need emergency cash, it’s wise to consider other options before turning to payday lenders. Some of these include credit counseling, creating a budget and opening a savings account.
Payday lenders are unlicensed
When searching for a payday loan, it is essential that the lender be licensed in your state. Otherwise, they could charge exorbitant interest rates and other hidden charges.
Fortunately, there are several ways to protect yourself from payday lenders who lack the necessary licenses. First and foremost, be sure to check the lender’s website for information regarding their licensing status.
Second, review the privacy policy to understand how the lender will utilize your personal information.
Third, be wary of online companies that do not possess a business license in your province.
Recent analysis by Texas Appleseed uncovered that 22 percent of payday loan leads were generated without a license. These leads were then sold to out-of-state payday lenders, many of whom were also unlicensed.
They charge high interest rates
Payday loans are short-term, high-interest loans that borrowers can get to cover unexpected bills. They do not require a credit check and may not require collateral or access to a bank account.
According to the Consumer Financial Protection Bureau, payday loan interest rates can range anywhere from 391%-600%. By comparison, other alternatives like credit cards, debt management programs and personal loans offer much lower rates.
Many people turn to payday loans for quick fixes in short-term situations. Unfortunately, they’re often not the most practical solution and can become a vicious cycle of debt by charging more and more fees with each renewal or re-borrow.
They are deceptive
Predatory payday lenders use social media platforms to make false promises of instant cash with no credit checks, late fees or interest rates. Unfortunately, these loans can become very costly in a short amount of time–especially for cash-strapped borrowers.
Furthermore, payday loans can often put borrowers in a cycle of debt. A CFPB study revealed that more than four out of every five payday loans are re-borrowed within one month – usually right when the loan is due or shortly thereafter.
To break free of this cycle, borrowers should avoid paying additional fees to roll over their loan. Furthermore, they should thoroughly read all terms and conditions prior to signing anything.
They trap borrowers in a cycle of debt
Payday lenders often lock borrowers in a cycle of debt through high interest rates, short repayment periods and hidden fees. In fact, payday loans tend to be more costly than credit cards or other consumer loans.
To avoid falling into a payday debt trap, borrowers need to be aware of the potential risks associated with these loans and look for alternative financing options. A small personal loan from a credit union or non-profit credit counseling agency might be one such example.
Many borrowers become trapped in payday loan cycles due to their precarious financial situations, lack of income and limited knowledge about alternative financing options. Furthermore, they may lack the courage to ask for assistance when needed.
The Consumer Financial Protection Bureau (CFPB) released a study that revealed how payday and deposit advance loans can lead to an ongoing cycle of debt for many borrowers. It noted factors such as lax lending standards and high costs as potential causes of this trend.
