It is so easy and fast to borrow from payday loan lenders. However, if you don’t have a good plan for how you will pay off the loan, the payday loan cycle can get out of control quickly.
Payday loan lenders don’t require credit checks or collateral, so they can provide you with small loans very quickly, usually by the next business day with a direct deposit to your checking account. And while this is very convenient, you need to consider the possible consequences of borrowing the money beforehand.
Because the loans are small and the terms are short (usually two weeks), the interest on the loan doesn’t seem that much at first. However, that interest can add up quickly.
For example, if you borrowed $200 and were charged $15 for each $100 that you borrowed, then the interest on the loan would be $30. This would be the total cost to you for borrowing the money.
That doesn’t seem like much until you consider that if you paid off the interest and then borrowed another $200 after two weeks to repay the initial loan, then the total cost would be $60 ($30 for the initial loan and then $30 for the second loan). If you continued this process for another 10 weeks (for a total of 14 weeks or just over three months) the total cost of the loan is $210, which would be more than the amount you originally borrowed.
This means you have paid the payday loan lender more than you originally borrowed without even paying back any of the initial payday advance. This is what it means for a payday loan to get out of control and why the average borrower pays $520 in interest on $375 being borrowed each year.
This is why you need a plan to pay it back. If your income isn’t much more than your expenses, which is likely, then you will probably need to figure out a way to get extra money to pay it off. This could be anything from working an extra shift at work to selling some personal property.
Another alternative is to borrow the money from another source. This could be from a more traditional lender with much better rates, such as a bank or credit union, or even from a friend or family member. The former option may not be an option for those with bad credit and the latter may require you to humble yourself and admit to someone close to you that you’re in a financial bind.
If you’re needing a payday advance to avoid a late fee from a creditor, you should try calling the creditor first and explain the situation. If you can explain the situation and show that you are being honest and are actually trying to make your payments, your creditor may be willing to waive the normal late fee as long as you are able to make your payment in full when you get your next paycheck.
In the end, the most important thing is to make sure you are spending as little as possible. Add up the actual costs and compare them for each alternative before deciding to borrow from payday loan lenders.