If you need quick cash, a payday loan can seem like a tempting offer. You can walk into a store, sign a few papers, and walk out with fast cash. But you’re not just signing up to get some money. You’re signing up to pay an ultra high-interest loan, one that’s often called predatory for how much it costs. Keep reading for a look at why you should always try to avoid payday loans.
A payday loan is a high-interest loan designed for people with no credit or poor credit. The loans are secured by your future paychecks. In most cases, the lender expects you to pay back the loan, including interest, on your next payday.
While some states limit the interest rates on payday loans, others give these short-term lenders extremely high limits, if any. For example, payday loans in Idaho, Nevada, Texas, and Utah have an average interest rate of over 600%. If you were to keep the loan for a year, it would be the same as paying it back six times over.
While you’re avoiding payday loans, it’s also a good idea to avoid other high-interest, short-term, predatory loans. Those include car title loans in addition to payday loans.
Payday lenders often charge their rate as a “financing charge.” You may have to look at the fine print to see the loan’s annual percentage rate (APR), the best way of comparing loan costs. While payday loans may charge over 600%, even high-interest credit cards rarely charge more than 30% APR.
To get a better idea of how those numbers add up, here’s an example. Let’s say Sam is short on cash for rent and needs to come up with $300 more by Friday. Sam goes to a payday lender for a $300 loan. The lender charges $50 for a loan due in two weeks.
The $50 charge and two-week payback period result in a financing cost of 434.52% APR. If you were to keep rolling the balance over and borrow that $300 for an entire year, you would pay $1,303.57.
If you think that’s way, way too much to pay to borrow, you’re right! Here are some better alternatives to payday loans:
With Payactiv, you can access earned income before payday. Earned Wage Access isn’t a payday loan. It’s an early payday for money you’ve already worked for and earned. There are no interest charges. Payactiv is free to use if you direct deposit your paycheck to your Payactiv card. Otherwise, there’s a $1 fee on the day you use the transfer feature, up to $5 maximum per pay period.
If you know about a significant expense in the future, you can save a little each month with an update to your budget. If you have an emergency fund, you have quick access to cash without any debt.
If you have a credit card, it’s a good idea to avoid borrowing more than you can afford to pay back every month in full. If you pay back your card balance before the due date, there are no interest charges. Carrying a balance month-to-month can be costly.
Unless the payday loan would prevent you from entering a dire living situation, you’re better off avoiding them. The huge costs give you almost nothing in return beyond enough cash to make it through a rough patch. If you can find an alternative, like borrowing money from a friend or family member, you’re much better off.
With Payactiv Earned Wage Access (EWA), you can access up to 50% of the income you’ve already earned, whenever you need it. EWA is not a loan, it’s your hard-earned money on a custom payment schedule. For millions of Americans living paycheck-to-paycheck, EWA is a lifesaving solution to bridge the gap between paydays. Learn more about Payactiv or download our free app to find a job that offers Earned Wage Access.
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