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Everything you need to know about payday loans


Angela Lang / CNET

For the millions of Americans living on paycheck after paycheck, running out of money is a constant and imminent concern. About 12 million people take out short-term unsecured loans – sometimes called “payday loans” – each year, according to the Federal Reserve Bank of Saint-Louis. And while these loans can help them survive until they get their next paycheck, they also come at a heavy price. Yet with millions of Americans without work or faced with reduced hours Due to the COVID-19 pandemic, many will continue to depend on this dangerous financial tool.

If you don’t have a strong credit history, it can be difficult to get a traditional loan or credit card. But there are many lenders who will allow you to borrow without a credit check, with few questions asked. However, the conditions will be severe and will definitely end up costing you a lot more than what you borrowed. With a deserved reputation as “predatory loans”, payday lenders have dragged many borrowers into a spiral of debt and regret.

If you are strapped for cash, you are not alone. But before you take out a payday loan, let’s take a look at what they are, why you should avoid them, and who you can borrow money from instead.

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What is a payday loan?

A payday loan is a short term unsecured loan that usually comes with a high rate of interest. Most payday loans come in small amounts, usually $ 500 or less.

With a traditional loan, you get a lump sum, then you start paying back over a set period of time – anywhere from a few months to a few years – with a “reasonable” interest rate added. With a payday loan, the full amount is due at one time, including interest and fees. In most cases, you will need to write a post-dated check for the full amount owed – the loan, plus interest and fees – or authorize your lender to debit the money from your bank account on that date.

The interest rates of payday loans are much higher than those of traditional loans. A standard APR for a personal loan ranges from 6% to 36%, but lenders offering payday loans may charge annual rates of 100% or more, and some have exceeded 1,000% depending on a survey by ProPublica in 2013. That said, some states have limits on interest and fees – and in some states, payday loans are banned completely.

It should also be noted that payday lenders tend to target people who live in areas with high poverty rates and low income levels, as well as minorities and economically disadvantaged groups, who have traditionally had more difficulty in qualifying for conventional loans, according to a study by the St. Louis Fed.

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Why You Should Avoid Payday Loans

There are twice as many payday lenders than McDonald’s restaurants in the United States – and borrowing money from any of them is about as easy as ordering a burger and fries. Getting approved is relatively easy: many payday lenders don’t even want to check your credit, therefore a tarnished credit history will not be a factor.

This is a benefit for people with poor or limited credit history. But high interest rates and strict repayment terms lock many into the payday lending trap where they are forced to take out new loans just to pay off existing loans.

If you don’t have enough cash to pay off your loan when it falls due, the lender can automatically trigger a withdrawal from your bank account. And if you don’t have enough money in your bank account to cover the costs, you could face an additional “insufficient funds” penalty. You may also be subject to penalties from the lender if they do not receive your money on time.

If your state allows payday lenders, you might see them in some parts of your city and not in others. For example, there might be more where poverty rates are high and income levels are low. These types of lenders tend to target minority groups as well as those with very low credit scores who are not otherwise eligible for traditional loans.

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Alternatives to a payday loan

If you are in dire need of cash to cover basic expenses, buy food, or pay off high-interest debt, there are other options to consider. Here are just a few:

Online lenders

There are many personal loans available online at more reasonable rates of interest. Even if your credit is below average, some lenders may look over your credit score when assessing your eligibility.

  • OneMain Financial has no minimum credit score requirement and you can borrow as little as $ 1,500, depending on where you live. APRs range from 18% to 35.99% and terms are two to five years. They also have a prequalification option to see if you are eligible without applying first.
  • Before loans start at around $ 2,000 and your credit score must be at least 580 to qualify. APRs range from 9.95% to 35.99% and repayment terms range from two to five years.
  • Reached takes your educational background and experience into consideration when assessing your eligibility. You can borrow as little as $ 1,000 and get your money back within a day of approval.

These lenders tend to have higher than normal interest rates compared to other personal lenders. However, they are all much cheaper than payday lenders.

Credit unions

If you have an account with a local credit union, you may find it easier to qualify for a personal loan. Most credit union interest rates are capped at around 18%, even for those with low credit ratings.

Many credit unions also offer payday loan alternatives – offering small loans with short repayment terms ranging from one to six months. Many credit unions require you to join before you borrow, but are willing to work with you if you don’t have good credit.

Recruit a co-signer

If you can’t get a loan from an online lender or credit union, you can get a friend or family member to co-sign a loan. The co-signer must have decent credit; it’s their credit score and history that will help you move on to eligibility. Keep in mind that if you are in arrears with your payment, not only your credit history to suffer; the same will apply to your co-signer.

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