Why Should You Be Cautious of Payday Loans?

Our needs are increasing day by day; however, the salary that we get increases slowly. As a result, most of us have very little or no savings at all. We depend on our pay for the monthly expenses. If there is a delay in salary or job loss, we cannot cope with our monthly needs. This scenario is the stark reality of the modern world.

There are times in our life when our monthly requirements exceed our monthly salary, and we look for a loan. There are different types of loans available in the market. You can go for a personal loan, cash advance, installment loan, credit card cash advance, or payday loan.

Each loan has its pros and cons. Based on your requirement and eligibility, you can choose the best for you. You may also borrow money from banks, traditional financial institutes, or direct lenders. However, if you have bad credit, they might reject your loan application.

What Is Payday Loan?

Payday loans are unsecured loans offered by independent direct loan lenders to individuals for a short time, i.e., either your next pay date or 31 days from the agreement, whichever comes early. These loans are associated with high-interest rates and other fees, which answers the frequently asked question – why should you be cautious of payday loans.

What Are the Advantages of Payday Loans

There are few but powerful advantages of payday loans due to which many of us get attracted to it. The first and foremost advantage is its processing time. These direct lenders take one to two working days to disburse the loan to your bank account. Many of them take a few hours to complete the process. Due to quick disbursement in nature, most of us tend to go for it.

The next most important advantage of a payday loan is no Teletrack and no credit check. The direct lender’s process payday loans without a credit check and Teletrack due to which they can handle it fast compared to other financial institutes. People with a bad credit history find it challenging to get a loan from banks and financial institutes. However, in the case of payday loans, you can quickly get them for your urgent requirement.

What Are the Disadvantages of Payday Loans

Besides the two most essential advantages mentioned above, these payday loans have a few disadvantages. One of the biggest problems of payday loans is very high-interest rates. Most of these payday loans come with a 15 to 30% interest rate, which is very high compared to personal loans and installment loans borrowed from banks and other financial institutes. Here we are listing a few points regarding “why should you be cautious of payday loans.”

High-Interest Rates

As said earlier, payday loans come with high-interest rates. It is one of the main reasons why payday loans are illegal in some states. Do know your state laws before taking payday loans from direct lenders. Many lenders offer these loans even if it is illegal in the U.S. state. Don’t become a trap to such lenders.

Payday loans charge high-interest rates somewhere around 15 to 30 percent of your sanctioned amount for a month. That is very high when you calculate annual interest for such loans. Taking a cash advance from your credit card for an interest rate of 1.75 to 3.75 per month is a much better option than going for a payday loan.

High Additional Charges

For any reason, if you are unable to repay these loans on time, then they charge any additional fees such as late payment charges, check return charges, other interest for the extra time, and so on. You may feel trapped with many costs once you cross the payment due date in such loans.

It is always advisable to check all these charges apart from interest rates. However, they are other hidden charges that will haunt you once you delay repayment of payday loans.

Small Tenure

Payday loans are for a very short tenure with interest rates. It can be for a week to a maximum of a month. These loans meet short-term requirements, which you can solve with your next paycheck, so the maximum tenure of such loans is your next paycheck date.

Most of us take a payday loan equal to our paychecks, and when the repayment day nears, we start thinking about the next month’s expenses. It stops us repay the loan or land up taking another new loan with high-interest rates. In any case, we end up becoming a part of the never-ending debt cycle.

Single Repayment

Single repayment loans are harder to close as compared with installment loans. Payday loans are single repayment personal loan, and you need to pay back the entire loan amount in a single go. These lenders take a check on their favor at the time of the agreement itself.

Some loan providers take permission for direct bank withdrawal so that they can withdraw the amount from your bank directly on your pay date. It puts you in further debt as a significant portion of your salary goes as repayment.

It Doesn’t Contribute to Credit Score

Some people apply for these loans thinking that taking a payday loan and repaying it on time will improve their bad credit score. However, they won’t report your loan details with credit agencies, due to which they won’t reflect on your credit report.

However, if you get defaulter and your loan goes to the collection agencies, then these collections agencies will report to the credit companies, and your credit report gets negatively impacted by this act. So, you end up with bad credit.

Harassment Calls From Lender

Before sending your details to debt collection agencies, these loan providers try to do whatever they can to get back their money. So, if you become a defaulter, then be ready to get several calls from them. They may harass you with regular calls and later can give you a threat of filing a criminal case against you.

Numerous Calls From Debt Collection Agencies

You may suddenly feel that the calls from the lender have stopped. Wait, this is silence before the storm. Once your account goes to a debt collection agency, your life will become hell. They will call day and night for the repayment along with hefty fines. Dealing with the collection agencies is extremely tough, and you need to be a pro loan defaulter to do so.

Contribute to Bad Credit Score Very Soon

Direct lenders never report their customers’ repayment history to the credit bureaus. However, if you cannot pay on time, the lender sells your account to collection agencies. The chances are very high that these agencies will report your non-repayment history to the credit bureaus.

The collection agencies work very fast, and they hardly give you any time before they report your non-repayment history to the credit bureaus. Hence you left with bad credit history in no time.

Court Summons

When you cannot repay the payday loan borrowed from the direct lender, they start calling you first. If calls don’t work, they mostly send a formal letter to your home or office for a meeting. It is the best time when you can negotiate with them and close your account. Based on the terms and conditions agreement you have signed during the disbursement process of such a loan, they may send you a court summons.

Never be threatened with these notices as the U.S. law states that there will be no arrest for non-repayment of payday loans due to any financial crises. Only if it is done willfully (to make a fraud), then only there may be a criminal case, and the person may put bind bars. Take the help of a good lawyer to deal with this situation.

The Target of Payday Lenders

Direct lenders work very cleverly and mostly target those people who are having a bad credit score, limited financial knowledge, and belong to lower-income. They work very smartly to deal with such people and trap them very quickly with their agreements. Most of them are uneducated or less educated, and they don’t understand most of the technical terms used in the contract.

What Are Other Alternatives of Payday Loans

We have mentioned so many disadvantages of payday loans, so you must be wondering about the alternatives available for such loans. Yes, there are many alternatives that you can try before applying for a payday loan. Some of these alternatives have lower interest rates.

Ask your family or friends for help – You can always tell your family members or friends about your financial problem and take their financial support to come out of this crisis. Your family will never harass you if you cannot repay the loan on time, and there is no or less interest to pay when you borrow money from your closed ones. Always check if this option is available for you. In times of crisis, family members and friends seem like saviors.

Search for other loans – search online to find out other loans that offer long tenure and lower interest rates than payday loans. Always try to take a loan from a bank or other financial institutes rather than a direct lender for your cash requirement.

Look for a loan on your credit card – most of the credit cards offer cash limits to their customers. Find out your limit by visiting the service provider’s website or store, and you can borrow it easily by going to an ATM near your location. A cash advance on credit cards is always cheaper than a payday loan.

Frequently Asked Questions