If you need cash quickly, payday loans may seem like the ideal solution. Unfortunately, these short-term loans often lead to debt accumulation and should never be relied upon as a reliable solution.
Instead, explore alternatives with lower fees and interest rates. Some options include credit cards, personal loans and borrowing from family or friends.
Payday lenders don’t report to the credit bureaus
Payday loans have become an increasingly popular solution for those needing a quick, short-term cash advance. Unfortunately, they can also be risky and costly.
Credit bureaus, who compile your credit report, consider various criteria to assess your creditworthiness. They take all of your data points and plug them into a formula to generate your score – which ranges from 0-850.
However, payday lenders do not use any of these criteria to determine if you qualify for a loan or not.
Instead, they rely on repeat customers – often low-income minorities living in impoverished neighborhoods – to charge exorbitant compounding interest on their cash advances and rarely provide workable repayment plans.
Borrowers may face debt collection issues if they fail to make timely payments on their loans. Furthermore, any loans that go into collections will appear on your credit report for six years, making it more difficult for borrowers to obtain lower interest rates on other types of credit in the future.
They charge high interest rates
Payday loans can be costly, with interest rates that can exceed 400%.
Financial assistance programs (FAPs) provide relief to financially challenged customers with limited access to credit. Often used to cover essential costs like rent or utilities, FAPs provide essential solutions that enable people to manage their affairs better.
But many borrowers struggle to repay their loans, leading them into multiple defaults and spiraling debt situations.
To avoid payday loans, it is wise to build up an emergency fund before you need them. Additionally, you could ask friends or family for assistance if needed.
You could also apply for a personal loan from your bank or credit union. These typically have lower interest rates than payday loans and may have longer terms, allowing you to pay them back over time.
State laws are increasingly restricting interest rates on payday loans, with some even banning them altogether. Yet payday lenders remain popular in low-income communities; therefore, it’s wise to shop around for a better loan deal and look for one who reports to major credit bureaus.
They don’t help you build credit
If you’re trying to build credit, a payday loan may not be your best bet. A personal installment loan is far more suitable.
Contrary to payday loans, personal installment loans require borrowers to make monthly payments over an agreed-upon period of time. This helps borrowers build a positive payment history on their credit report which in turn raises their overall credit score.
If you’re thinking of taking out a payday loan, be sure to do your research first. These loans often have hidden fees and high interest rates that can quickly spiral into a debt cycle. Kym Johnson, a single mother living in the Triangle area, paid $1254 in fees over 17 months to renew her $300 loan 35 times. Eventually she found a lender who allowed her to pay off the original $300 in small amounts but it took another eight months until she broke free from this financial bind.
They require a hard credit check
Payday lenders will run a credit check on you when applying for a payday loan. This hard credit inquiry may remain on your report for up to two years, potentially lowering your credit score.
Many lenders, however, opt for a “soft” credit check that does not affect your score. This is essential for those with bad credit who need to get approved for payday loans.
Payday loans are short-term, high-cost personal loans intended to be repaid on your next payday – usually two weeks from when you took out the loan. When due, borrowers typically write a postdated check to cover their loan plus fees and authorize the lender to electronically withdraw money from their bank account.
