It’s hard to find yourself in a situation where you need the cash right away, but you are not alone. In fact, 42% of millennials have used methods like payday loans to deal with debt, according to a study by the Global Financial Literacy Excellence Center at George Washington University.
Related: What Not To Do When Trying To Get Out Of Debt
So what is a payday loan? The Consumer Financial Protection Bureau defines a payday loan as a short-term, high-interest, no-credit-check loan, which typically does not exceed $ 500.
Payday loans can be obtained online or through physical locations. When you don’t have a financial cushion in place, and you need the cash quickly, a payday advance may seem like a good solution. But using a payday loan to get out of debt could be a costly mistake.
Learn about payday loans, what their downside is, why they might not be the best way to get out of debt, and whether payday loans affect your credit rating.
Last updated: March 2, 2022
5 reasons to avoid payday loans
Payday loans can be tempting when you have limited financial resources, but consider the dangers of payday loans before signing on the dotted line. Read on to see the five disadvantages of payday loans.
Read: 11 Basic Money Moves Everyone Should Make During Hard Times
1. They create a cycle of debt
When your financial resources are almost depleted, getting a payday loan can help you temporarily. But at the end of the day, all you do is position yourself to take on more debt.
About 75% of payday loans go to people who take out 11 or more loans per year, according to CFPB data. Unfortunately, many people cannot repay their payday loans when due, so they consolidate the borrowed funds into a new loan and create a cycle of debt.
Check Out: The 8 Best Payday Advance Apps To Close A Cash Gap
2. High fees apply
Credit card APRs are typically between 12% and 30%. The average two-week payday loan, however, has a fee of $ 15 for every $ 100 borrowed – an APR that equates to nearly 400% per loan, according to the CFPB.
A short-term payday loan of $ 400, for example, could cost you $ 60 in fees. And if you extend the loan long enough, you could end up owing as much in fees as you originally borrowed.
Take a look: 30 ways to get out of debt
3. Rollovers allow you to get deeper into debt
When a payday loan is due, and you cannot pay the full amount, some lenders will allow you to pay the upfront fee only to extend the due date. But then another charge for the same amount is added to the principal.
For example, if you borrowed $ 200, with a charge of $ 15 for every $ 100 borrowed, you will owe $ 230 on your next payday. On your next payday, if you choose to pay the $ 30 fee to extend the loan, the lender will add an additional $ 30 fee, and so on. Before you know it, you could be paying almost $ 100 in fees without reducing the principal.
4. They come with the potential for repeat fundraising calls
Since these high-risk loans are also expensive, you might not be able to repay your loan on time, which could lead to repeated calls from debt collectors. The Fair Debt Collection Practices Act states that a debt collector, such as an online payday loan representative, is not allowed to contact you repeatedly with the intent to annoy you, abuse you, or harm you. Harass you. Also, debt collectors are only supposed to call within the hours of 8 am to 9 pm.
5. They are not a solution to big financial problems
According to the CFPB, payday or online loans are generally capped at $ 500. So don’t expect this type of loan to help you get out of debt for good or face major expenses like replacing a roof. According to Fixer.com, a DIY services site, the national average for the cost of a roof replacement is over $ 6,000.
Alternatives to payday loans
With a little research, you can find other potential options to make money fast without high fees. Take a look at these payday loan alternatives.
1. Borrow from a trusted friend or family member
While it can be awkward, humbly approach a friend or family member you trust and explain why you need to borrow money. Offer to have a specific but realistic written payment plan to show that you intend to repay the loan. Even if the person wants interest in loaning you the money, it probably won’t be something like you would with a payday loan.
Read: I secretly got us in serious debt: how to break the news
2. Get a side job that offers immediate payment
Do not underestimate the income potential of a good side activity; opportunities with immediate payment are available. These examples include, but are not limited to:
Lyft or Uber: Drive your car as an alternative to a taxi service, and get an immediate payout with just $ 50 earned. You might have to pay a 50-cent instant payment fee to get your money back, but it’s your money, not the money you have to pay back.
Uber eats: Forget about handling passengers and delivering food instead of side work or weekend work. Apply with Uber Eats, a delivery service for people who want food from their favorite restaurants delivered right to their doorstep.
Craigslist Ads: Search concert listings to find jobs that pay quickly. You might find opportunities to help people pack their bags for a move, driving jobs, cleaning jobs, or childcare opportunities.
3. Seek credit counseling
Having a qualified professional who knows the ins and outs of debt management can prove to be beneficial. Contact a reputable service, such as the National Foundation for Credit Counseling, and speak with a credit counselor who can help you create a realistic, personalized budget as part of a debt relief plan.
Find other ways to pay off your debt.
Payday loans can be extremely dangerous to your financial health, especially if you are already struggling with debt. With the high fees charged by payday lenders and the ability to extend loans more than once, you can easily find yourself in a cycle of debt, a target of collection efforts, or both.
Take other steps to pay off your debts right away, like borrowing from a friend or family member or getting a side job that pays off quickly. Next, consider contacting a credit counselor to help you get out of debt for good.
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This article originally appeared on GOBankingRates.com: Why Payday Loans Are Dangerous.