The most obvious problem with payday loans is the cost. We just did an example of a borrower who pays $75 in interest for a $500 loan. If that was the cost of interest for a full year, the interest rate would be 15%. That would be a decent rate for someone who has either bad credit or no credit, and is taking an unsecured loan.
The payday lenders are keenly aware that the likelihood of being repaid declines with the size of the loan
But the $75 is the interest charged for just two weeks. If you annualize the interest charged for two weeks, it comes to nearly 300%. In fact, 300% is on the low end. Payday lenders often charge 400%, 500%, or even much more.
What makes it even more concerning is the fact that it is the interest rate being charged to the people who can least afford it. If a person doesn’t have $500 today, they probably won’t be any more likely to have $575 in two weeks. But that’s what they’ll have to come up with.
People who take payday loans often get locked into an ongoing cycle. One payday loan creates the need for a second, which creates the need for a third, and so on.
The problem is that the borrower usually needs to take another payday loan to pay off the first one. The whole reason for taking the first payday loan was that they didn’t have the money for an emergency need. Since regular earnings will be consumed by regular expenses, they won’t be any better off in two weeks.
The lender might provide continuous financing by rolling over the loan every two weeks. The borrower will have to pay the interest every two weeks, but the original loan balance will remain outstanding.
Because the borrower will have to pay $75 every two weeks, he’ll end up paying $1,950 in interest in order to gain the one-time benefit of the $500 loan.
And should you be unable to make good on your payday loan, lenders are among the most savage when it comes to collecting. You will not only be hounded by collection calls and threats, but you almost certainly will be slapped with a court judgment.
Alternatives to payday loans
I want to recommend two good alternatives for trying to steer clear from payday loans since payday loans trap you into a cycle that’s almost impossible to get out of.
One of the best alternatives to a payday loan is to take out a personal loan from a reputable lender. While personal loans still accumulate interest over time, the interest rate is much, much lower than predatory payday loans. Even borrowers with poor credit may qualify for a personal loan from some lenders.
Loan comparison tools like Monevo can help you quickly and easily compare lenders, check rates, and see which loans you may prequalify for. Monevo lets you compare over 30 different banks and lenders, and features a quick and easy rate check process that won’t affect no credit check payday loans Painesville OH your credit score.
The best part, however, is the fact that Monevo is completely free to use, and many of the lenders Monevo partners with can have funds deposited into your bank account in as soon as one business day.
Another option is a Cash Advance from Empower. Check your eligibility in the app and, if you qualify, you’ll get up to $250? deposited directly into your bank account. You won’t pay late fees or interest on the Cash Advance. Empower will simply take the amount that was advanced out of your next direct deposit, as agreed in the app.