Are Payday Loans a Good Idea?

Payday loans are designed to trap you in a debt cycle. When an emergency happens and you have poor credit and you don't have savings, it may seem like you have no other choice.

Are Payday Loans a Good Idea?

Payday loans are designed to trap you in a debt cycle. When an emergency happens and you have poor credit and you don't have savings, it may seem like you have no other choice. But choosing a payday loan negatively affects your credit, any savings you might have had, and may even cause you to take you to court. Is it bad to get a quick payday loan? Yes.

That's because they'll slap you in the face with huge fees. Fast payday loans come at a huge cost: they have significant interest rates. Yes, applying for a personal loan means getting more into debt, but it will cost much less than a payday loan. Payday loans can be very tempting, especially for those who have no cash reserves and a credit history lower than the pound sterling.

But be careful, just because a payday lender doesn't seem to care about your creditworthiness doesn't mean borrowing money isn't dangerous. With good credit, you can be approved for low-interest personal loans instead of resorting to payday loans. Payday lenders must disclose the financial charge and annual interest rate (APR) in writing before signing the loan. Payday loans have some advantages, although they don't outweigh the disadvantages, which we'll get to in a minute.

Loans are for small amounts, have reasonable interest rates, with terms of 12 to 24 months. The borrower will have to pay interest every two weeks, but the original loan balance will remain outstanding. And that's more people than you'd expect (including a particular focus on payday lenders on women of color). Payday lenders advertise on TV, radio, online and by mail, targeting workers who can't arrive paycheck to paycheck.

Or, sometimes, you must give the lender the ability to withdraw the funds electronically from your bank account when the loan is due, which is usually when you receive your next paycheck. The loan funds will be immediately deposited into a dedicated savings account in your name (you will not have access to the funds in the account). Compare the 15%-30% APR on credit cards or the 10%-25% rate for a personal loan from a bank or credit union and it's hard to understand why anyone would choose this path. Payday loans are most often requested by those who have ongoing cash flow problems, unlike borrowers facing a financial emergency.

Other options include borrowing money needed to repay the loan from friends or family, or freeing up funds by postponing repayment of a less pressing debt. Instead of torpedoing your credit score, immediately notify the lender if you know your loan check will be returned and request a payment plan. They may ask you to set up a small regular savings plan when you apply for a loan with them, to reduce your need to reapply for a loan. Borrowers tolerate the postdated check agreement because lenders ignore the other major component that lenders normally consider, credit history.

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