When an emergency strikes and you have poor credit and no savings, it may seem like you have no other choice but to take out a payday loan. But is it really a good idea? The truth is, payday loans come with a huge cost: high interest rates and the potential to trap you in a debt cycle. Yes, it's bad to get a quick payday loan. Payday loans are designed to be short-term solutions for those who have no cash reserves and a credit history lower than the pound sterling.
They offer small amounts of money with interest rates ranging from 15%-30%. But these loans come with a catch: you must give the lender the ability to withdraw the funds electronically from your bank account when the loan is due, usually when you receive your next paycheck. Payday lenders advertise on TV, radio, online and by mail, targeting workers who can't arrive paycheck to paycheck. And that's more people than you'd expect (including a particular focus on payday lenders on women of color).
Payday loans have some advantages, such as reasonable interest rates and terms of 12 to 24 months. But these don't outweigh the disadvantages. For example, borrowers must pay interest every two weeks, but the original loan balance will remain outstanding. And if you can't pay back the loan on time, you'll be hit with huge fees.
If you have good credit, you can be approved for low-interest personal loans instead of resorting to payday loans. Personal loans come with much lower interest rates than payday loans, and they don't require you to give the lender access to your bank account. If you're considering taking out a payday loan, there are other options available. You could borrow money needed to repay the loan from friends or family, or free up funds by postponing repayment of a less pressing debt.
You could also set up a small regular savings plan when you apply for a loan with them, to reduce your need to reapply for a loan. Finally, if you know your loan check will be returned, immediately notify the lender and request a payment plan. This will help you avoid torpedoing your credit score.