When you’re struggling to make ends meet, you may be tempted to take any financial relief you can get. However, some forms of short-term relief, such as payday loans, can cause even more stress in the end.
Payday loans are loans that are made for a short period of time, often two weeks, mimicking a pay period. Typically, when you visit a payday lender, you tell them how much you’d like to borrow, and they tell you what fee they’ll charge for that amount. You give them a check to hold for the total amount of the loan and any fees, and they give you the amount of the loan in cash.
The Federal Trade Commission highlights an example of how a typical payday loan may work.
In this scenario, if you don’t repay the loan back in full, the payday lender may cash the check or use the provided checking account information to attempt to collect the funds, even if there’s not enough money in the account. This can cause you to face additional bounced check or overdraft fees.
Payday loans are problematic because of the substantial fees they charge to borrow money for a short period of time. The APR (or interest rate) on payday loans is typically very high and far greater than what someone would be charged if they borrowed the same amount from a traditional financial institution, such as a credit union or bank.
In the best-case scenario, borrowers can pay off payday loans in full by the due date, being affected only in the short term due to the high fees they were charged.
Unfortunately, many payday lenders bank on borrowers falling into more of a worst-case scenario. This is how they’re able to make a great deal of money – borrowers can’t pay off the loans and rack up increasing amounts of debt by extending the due date or getting into a dangerous cycle of borrowing additional funds to pay off the fees they’ve incurred.
Payday lenders are often classified as predatory lenders. This is due to the high fees referenced above, as well as some unsavory practices that are common in this industry.
Payday lenders are typically more prevalent in areas with underserved populations. They may open offices in locations with limited access to reliable credit unions and banks. They may also target advertising to low-income households or those with damaged credit who are unlikely to get approved for a typically lower-cost credit union or bank loan.
Additionally, payday lenders often look to profit from situations in which people are vulnerable. By tapping into people’s emotions during difficult times, they can position themselves as a source of immediate relief or an easy, quick fix. Unfortunately, as described above, this short-term relief can cause long-term financial and emotional distress.
If you’re in a tight financial situation and need relief, there are options to consider before visiting a payday lender.
The first is to reach out to a reputable credit union or bank and determine if there are loan options that you qualify for at a reasonable interest rate. Especially during times of crisis, some financial institutions may offer loans at lower interest rates than usual, allowing you to save more on interest in the short and long term.
Unfortunately, if you have poor or limited credit, there’s a chance that you won’t qualify for a traditional loan from a credit union or bank. However, there are still steps you can take to make ends meet and protect your finances from long-term harm without taking out a payday loan. These include:
If you’re facing a financial crisis, you’re not alone. We have resources that can help you as you navigate the impacts of your current situation. Visit our blog for helpful information on topics such as preparing for a layoff, managing student loans, and effectively using your emergency fund.
These resources are free to members and non-members. If you’re not a member, you might consider joining our credit union for perks like free checking and surcharge-free ATM access through our 70,000+ ATM network. Apply today!