Why You Shouldn't Pursue Payday Loans

You’re getting paid next week, but you’re a couple hundred dollars short on rent. Your friends can’t lend you money, and you don’t qualify for a bank loan. Is getting a payday loan the next step?

The answer to this question is an emphatic no. Payday loans might seem like a quick way to solve a temporary issue, but for many people, they lead to years-long cycles of debt and stress. Take a look at why you shouldn't pursue payday loans.

Why you shouldn't pursue payday loans

Payday loans let you access cash quickly, but that’s one of their very few advantages. These short-term loans come with significant downsides.

The fees add up faster than you expect

Payday loans can come with a number of fees, including:

• Application/processing fees
• Flat borrowing fees (usually $15 to 30 per $100 borrowed)
• Rollover fees 
• Late fees
• Overdraft fees (if your bank balance can’t cover the loan)

These fees compound over time, and it’s not unusual for people to end up paying multiple times the amount they borrowed.

The repayment timeline is too short

Most people take out payday loans believing they can cover them with their next paycheck. However, because they usually only have two weeks to pay back the loan, they often can’t afford to repay it and still cover their other bills.

They can trap you in a cycle of debt

Between the excessive fees and short repayment timelines, many people get caught in a cycle of rolling over their loans and being unable to pay them. The amount of debt grows, and borrowers often experience even greater financial stress.

They don't help you build credit

Unlike credit cards and personal loans, payday loans usually won’t help you build your credit. These lenders don’t usually check your credit scores or report payments to credit bureaus. 

However, if you can’t pay a payday loan and it goes to collections, the collection account can appear on your credit report and cause serious damage.

Better options are usually available

Most people who take out payday loans understand that these loans aren’t financially healthy. They often see payday loans as their only option to get out of a financial bind. However, there are usually better alternatives. 

What is a payday loan?

A payday loan is a short-term, high-interest loan designed to be repaid on the borrower’s next payday. Usually, that means it must be paid in full within two weeks.

The average interest rate on a payday loan is around 400%, but in some cases, interest rates go over 600%. For the sake of comparison, credit cards usually have interest rates of 22% to 30%.

How payday loans work

Payday lending is a lot different from taking out a personal loan or credit card. Notably, payday lenders usually won’t check credit. Instead, they’ll ask you to provide proof of income. If you’re approved, you usually must either allow the lender to take money from your bank account on your next payday or give them a post-dated check.

If you can’t afford to repay the loan by your next payday, you might be able to “roll it over.” That means you pay the fees but extend the loan. Over time, you could end up paying much more than what you originally borrowed.

Who typically uses them and why

Most people who use payday loans are employed and living paycheck to paycheck. The majority make less than $40,000 per year. They usually have no savings and can't access credit cards, personal loans, and other kinds of traditional credit.

Most of the time, people who get payday loans are trying to fill gaps in cash flow to pay for rent, utilities, and other essential expenses.

Alternatives to payday loans

Now you have a better understanding of why you shouldn't pursue payday loans. But what happens when you’re in urgent need of funds? Fortunately, there are more options than many people realize. 

Cash advance apps

Payday loans have exorbitant interest rates. Cash advances on credit cards often aren’t quite as bad, but they’re still high enough to cause financial trouble. 

If you have a cash advance app, you can access funds when you need them without getting buried under sky-high interest rates.

Grant Cash Advance is one of these apps. If you’re a qualifying member, you may access cash advances from $25 to $500. You can access cash when you need it and then pay it back when you get your next paycheck.

Credit unions and small personal loans

Many people who take out payday loans do so because they think their credit is too poor to qualify for a personal loan. If you don’t qualify for a personal loan from a bank (or even from an online lender), it’s worth getting in touch with your local credit union.

Because credit unions are focused on their communities, they often offer credit to people who don’t qualify with a traditional bank.

Some federal credit unions offer loans specifically designed for people trying to avoid payday loans. Payday alternative loans (PALs) let you access relatively small amounts of cash, like payday loans do. But unlike payday loans, they have capped interest rates.

Community assistance programs

Depending on your financial situation, you might be able to benefit from assistance programs. 

Some of these programs, like the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF), are available on the federal level. Others are offered by local governments, churches, and private organizations.

If you want to find out what services are in your area, call 211 or visit 211.org. 

Negotiating with creditors directly

Many people get stuck in the payday loan cycle because they have to take out new debt to cover old debt. Then, they fall into a debt spiral that can last for years.

If you’re in a similar debt spiral or think you’re getting close to one, it might be time to consider reaching out to your existing creditors directly. Some may be willing to settle debt for less than face value. Others may be willing to temporarily pause payments while you get back on your feet.

Step away from payday loans and toward a brighter future

Payday loans were designed to attract people in times of desperate financial need and trap them in never-ending debt cycles. Unfortunately, many people in need still turn to payday loans because they believe there’s no alternative. 

When you understand why you shouldn't pursue payday loans and realize that there are other options available, you’ll be in a better position to improve your finances and start working toward improved financial stability.

Grant Cash Advance is here to support you on your journey toward financial wellness. Learn more or create your account with us today!