Have you ever heard about payday loans and wondered what they mean? If not, you are in luck!
Here in this article, we’ll tell you what it means and tips on how you can avoid it. Read to learn more!
What Is a Payday Loan?
A payday loan is a short-term loan that is characterized by high-interest rates in exchange for immediate credit. It can also be called a cash advance loan, wherein the principal is a part of your next paycheck.
Payday loans are easy to arrange and don’t require collateral, making them unsecured. They are mostly available through storefront lenders or online, seldom in reputable banks.
Financial experts consider payday loans as predatory lending because of their high-interest rates and fees. For instance, the average APY (annual percentage yield) of payday loans is 400%. They also do not assess the borrower’s repayment capacity, creating a debt trap for consumers.
A lot of borrowers are unable to repay payday loans in the typical two-week period. This causes borrowers to acquire more loans to pay off the first one or pay off additional interests and fees for delayed payments. This puts them on a financial quicksand that sinks them deeper into debt.
What Are Better Options than Payday Loans?
If you find yourself needing cash, there are several ways that you can take a loan while avoiding payday loans. Here are some better alternatives that you can try:
Borrow money from a family member or friend
If you need some cash and are sure that you’ll be able to repay next payday, you can reach out to your family members or some friends. This will save you money paid on interest and fees and will usually not require you to put in collateral. Just make sure that you pay them back at the agreed time.
Get a personal loan from a bank
Banks usually offer personal loans with no collateral at higher rates than usual. This is under the requirement that you qualify for their program, and you would need to undergo a credit assessment. The process is usually quick, and you can secure a loan for three days or less. Although there are additional steps that you must take, personal loans have better interests than payday loans.
Acquire a loan from a credit union or an online lender
This process has higher interest rates than the bank, but they are still more affordable than payday loans. Credit unions and online lenders cater to applicants with low credit scores, so you don’t need to worry about this. The process is also quick and straightforward, and you can get the personal loan the next business day.
Conclusion
Payday loans are quick and easy loans but are characterized by high-interest rates. Financial experts often warn about them because they can create a financial quicksand for most people. If you’re in an emergency and in need of some cash, there are better alternatives that you can avail of instead of choosing payday loans.