An extra expense can blow your budget when you’re living paycheck to paycheck. An unexpected cost like your car breaking down on the way to work, or your child needing to visit the emergency room with a fever can leave you strapped with bills you’re unable to pay.
Some people feel they have no choice but to turn to payday loans when something like this happens. After all, they’re easier to access than other forms of credit due to their lax credit rating requirements for borrowers.
However, easy acquisition disguises four good reasons to steer clear of payday loans.
You’ll Have to Grant Access to Your Bank Account
Payday loans are pretty invasive by nature. To apply, you’ll need to offer up your ID, checking account information and proof of income. You’ll then receive the amount of the loan upon approval. When your next payday arrives, the lender will likely access your bank account to collect that amount back from you — plus any fees and interest.
If the lender doesn’t automatically withdraw the funds from your bank account, they will have you sign a post-dated check to coincide with your payday. This ensures the lender can get their money back immediately when you get paid, possibly even before you fulfill your other financial obligations.
The Average Interest Rate Is 391 Percent
All loans carry interest, but certainly not to the tune of 391 percent on average — which is the average payday loan annual percentage rate (APR) if paid in full after two weeks. It’s not uncommon to see payday loan interest rates ranging from 35 percent to a whopping 400 percent. Rates will vary by state, but some allow even higher rates, like Texas with 661 percent.
Compare these triple-digit figures to the average APR on a credit card, which is closer to 20 percent. As you can see, it’s incredibly expensive to borrow money through a payday lender. Although legislation in the House of Representatives and Senate have been introduced to cap all payday interest at 36 percent — which lawmakers have already done for members of the military — the proposed bill has a way to go before it’s enacted.
You Could Pay More in Fees Than You Borrowed
Fees and interest on payday loans are actually so expensive you may end up paying more for the privilege of borrowing the money than the amount you borrowed in the first place.
Say you want to borrow $1,000 to float your bills between paychecks. A fairly typical fee per $100 is $15. So, you’ll have to present the lender with a postdated check for $1,150 or access to your checking account so they can deduct that amount. However, problems arise if you’re unable to pay on the specified date because you’ll have to roll the loan over for additional charges and interest.
Depending on the amount you borrowed and the interest rate at play, you may end up paying more in extra charges than you originally needed to take out.
For this reason alone, it’s well worth exploring other options before jumping into a payday loan. You may be able to qualify for a personal loan at a more reasonable interest rate that you can pay back to the lender in installments instead of all at once from a single paycheck. Debt settlement is another potential avenue for dealing with certain financial obligations — these Freedom Debt Relief reviews provide more context for what to expect from that process.
Borrowers Can Become Dependent on Payday Loans
According to the Consumer Financial Protection Bureau, most borrowers have to renew or reborrow payday loans. In fact, eight in 10 payday loans are taken out within just two weeks of a consumer repaying their previous payday loans.
This speaks to how easy it is to get trapped in a vicious cycle fraught with ever-growing interest. The industry is built upon borrowers’ inability to pay back loans in full — often leaving them much worse off than before they borrowed any money at all.
These four reasons just go to show why you should stay away from payday loans unless you have literally no other options. They’re expensive and predatory, to say the least.