If you find yourself in a situation where you need more cash than you have income, payday loans may look like an attractive option. What could be easier than walking into a lender’s office, and then walking out with a few hundred dollars in cash an hour later? Unfortunately, if something seems too good to be true, it probably is. Here are several reasons why you should avoid payday loans.
Why Should You Avoid Payday Loans?
High Interest Rates
Payday loans have interest rates that are much higher than normal loans. In fact, the average two-week payday loan has a fee of around $15 per $100 borrowed. That’s an APR in the triple digits! If you need to extend the loan (most people who take out payday loans do), you could end up paying as much in interest and fees as the amount you borrowed.
When you get a payday loan, you have to sign a contract that states that you give the lender permission to take money out of your bank account automatically. This can become a problem if you do not have the money in your bank account to pay back the loan. If the money is not there, this will trigger bank fees against you.
Limit on the Amount You Can Borrow
If you’re looking to borrow a lot of money, payday loans definitely are not the way to go. The amount you can borrow differs depending on where you live, but even if you live in a state that allows you to borrow a larger sum, it will still not exceed $1,000. Most states place the limit anywhere between $300 and $1,000.
Potential Impact on Credit Score
Lenders typically will not check your credit score before you get a payday loan, and if you pay the loan back on time, it is unlikely that this will be reported to the credit bureaus. This means that it will not improve your credit score. However, if you fail to pay back the loan, it goes to a collections agency. This will have damage your credit score. Essentially, the only impact payday loans can have on your credit score is a negative one.
There are so many reasons why you should avoid payday loans. They are not worth it, and there are other options available if you are going through financial hardship. One option would be talking to a credit counseling agency to see how they can help. American Consumer Credit Counseling offers debt management programs, housing counseling, and free financial education materials.
To speak to a certified credit counselor at ACCC, call 800-769-3571.