If you are short on cash, you might be looking for options on how to get money fast. Sure, you might be able to ask your parents or best friends for $50 here and there, but what if you need more money? Perhaps you have heard of a payday loan or even considered taking one out.
What is a payday loan?
A payday loan is a short-term loan that you can take out for one or two weeks. It’s usually a loan that you take out against your upcoming paycheck or income. Payday lenders commonly have a storefront, but they are also available online.
Typically, payday loans come with super quick approvals. Some would say it’s too easy. Because a payday lender isn’t a bank, it's usually too good to be true.
How do payday loans work?
When you apply for a payday loan, either online or in-person, you have to write a postdated check with both the amount that you owe and the interest charged. Or sometimes, you have to give the lender the ability to withdraw the funds electronically from your bank account when the loan is due, which is usually when you get your next paycheck.
The application is usually approved very quickly and takes less than 20 minutes. All the lenders need is proof of a bank account and proof that you have a job. Once they approve your loan, the money is deposited into your bank account.
Who would typically get a payday loan?
Sellers or these fast payday loans (loan sharks) normally target people who don’t have good credit or decent savings. Essentially, the very people who can’t really afford to take out one.
And that’s more people than you might expect (including a particular focus of payday lenders on women of color). According to a survey by GoBankingRates, 69% of Americans have less than $1,000 in savings.
However, because payday lenders don’t normally care about things like credit, it’s easy for those with no or low credit scores to get approved. 1 in 3 college-age Americans has considered payday loans. In addition, about 12 million Americans take out instant payday loans each year.
How much do payday loans give you?
The maximum amount of a payday loan you can get varies by state, and it is illegal in some places, but it’s usually between $300 and $1,000.
But in order to understand the true cost of a loan, you also need to understand how much they charge in interest. Because a payday loan is a short-term loan, usually of around 14 days, it might seem like the interest is low. But it’s not.
Let’s say you take out a $375 loan, and the interest is 15%. That means you have to pay $56.25 to borrow $375.
If you take the $375, your annual interest rate is actually 391%. That is compared to an average annual interest rate of 15% to 30% for credit cards.
What happens when you are late or don't pay back a payday loan?
The difficulty with fast payday loans is that if you’re already struggling financially, it might be difficult to pay off the initial loan. If you can’t pay back the loan, you can ask the lender to roll it over. That means you have to pay the original loan amount and interest rate, plus an additional finance charge on top of that.
Why fast payday loans are a bad idea
Is it bad to get a fast payday loan? Yes. That’s because they will slap you with huge fees. Fast payday loans come at a huge cost- they have significant interest rates.
In fact, their interest rates are often higher than the interest rates of credit cards. If you’re already struggling to pay your monthly bills, the last thing you need is to take on more debt.
While payday loans don’t normally show up on your credit report by the major reporting agencies, they can be found if a lender does an application search to find out all the loans you have borrowed. It is likely this will have a negative impact on your chances of getting a loan.
To avoid a payday loan impacting your credit score, pay it off as soon as possible.
How to get out of a payday loan
Unfortunately, getting out of an instant payday loan isn’t easy if your finances are not secure. First, make sure you don’t borrow any more loans.
Check to see if the payday lender will give you a payment plan to avoid late fees. Otherwise, try to get a personal loan or another lower-interest debt, preferably with a fixed interest rate, to pay off the payday loan.
Yes, taking on a personal loan means taking on more debt, but it will come at a much smaller cost than a payday loan.
How to avoid needing a payday loan in the first place
If you are tempted to get a payday loan, think about it first. Do you really need the money, or can you wait until your next paycheck? If you have a medical or house emergency, consider using a credit card instead.
You can also use a credit card cash advance. Talk to your local bank or credit union about a short-term personal loan. The interest will be high, but it won’t be nearly as high as rates from payday lenders.
You may also want to talk to your boss first. Chances are, if you explain the situation to them, they might be able to give part if not all of your paycheck to you in advance.
Payday loan alternatives
We all sometimes hit a rough patch in our finances. But before you bury yourself under instant payday loans, consider these payday loan alternatives instead if you need some extra cash.
Set a budget
You can avoid being short on cash in the first place by creating and sticking to a budget. Keep track of all of your expenses and cut out anything you don’t need. You can even use the envelope method and take out cash and put the money you need for two weeks in specific envelopes. Plus, using cash makes people spend less money!
Create an emergency fund
An emergency fund is the best payday loan alternative. A bit like a savings account, an emergency fund is there for those unexpected times when you need extra money. If your car breaks down or you get sick, having a few months of living expenses saved up can help you avoid needing to take out a loan in the first place.
The goal is to eventually save 3-6 months of living expenses. However, you can work on your first $1,000, then continue to build it up.
Get a sinking fund
A sinking fund is a bit like an emergency fund, but it’s set aside for a specific expense. If you know you will have a big financial expense in the future; you can set aside a bit of each money each month until you reach your goal. That way, you aren’t eating into your living expenses when the event comes up.
Consider a salary advance
A salary advance loan is a loan provided by your employer that lets you borrow money from your future paycheck. You can use the money to cover an emergency and pay it back when you get paid. However, they are short-term loans that will need to be paid back from your next paycheck. Not all employers offer them.
Increase your income
Finding ways to increase your income is another excellent payday loan alternative. Try to see if you can get more hours at work or perhaps ask for a raise if it is appropriate. Look for creative ways to earn money and increase your income.
Instant payday loans are bad for your finances!
It's important to explore payday loan alternatives if you are short on cash. Instant payday loans can cost you not just financially but emotionally as well. Focus on avoiding them altogether.
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