Loans, in general, are risky. It should be avoided at all cost. Loans are generally money that you don’t have. So you get it and you have to pay it off over a certain period of time with interest. Failure to pay off at the given or agreed time would mean additional interest. But there are really times when people get themselves in a bind and a loan is inevitable.
If you absolutely have to take out a loan, just don’t get a payday loan. What is a payday loan? WHy should you avoid a payday loan?
As the name implies, it is a loan that will be taken out of your payday. In other words, it is a cash advance. However, while cash advance sounds harmless, the actual loan could be harmful to your future finances.
How does a payday loan work?
So the payday loan is short-term and usually less than $1,000. Since it’s a payday loan, the idea is that it should be less than the actual pay you receive during pay day because you are supposed to pay it back on the day the next salary rolls in. Depending on the lender, the interest or loan fee ranges between 15 to 30 percent. That is translated to $15 to $30 for every $100 owed. In theory, it doesn’t sound that bad. But when you consider how short your grace period is, it’s actually quite steep. It is more than the interest you get from credit card companies. The annual percentage rate of a payday loan is 391 percent. But according to the Consumer Financial Protection Bureau, this could go as high as 2,100 percent.
Moreover, say you actually need $1,000 in emergency fund. But when you take out the payday loan, the lender will deduct the feed in advance rather than add it to your amortization. So from your $1,000 loan, you can only take home between $700 and $850.
Payment term is at least 14 days—remember, it’s supposed to be during the next payday. That doesn’t sound like an enough time to pay off $1,000.
The danger of payday loans
Because this is a payday loan, most lenders will need to have access to your bank account. Some will take your ATM card as leverage while others get your bank account details. When the salary arrives, the lender will be the first to take out cash from your bank account. Sometimes, the lender will take out cash in more than one withdrawal with a fee for every activity.
If you have several office deductions, chances are you will not be able to afford to pay off the loan. On the part of the lender, he will “rollover” your unpaid loan—meaning, you involuntarily take out another payday loan for another fee. On the part of the bank, there is a possibility that you will be charged with bank overdraft if the lender withdraws more than the balance in the account.
You take out a loan because you were financially distraught. But with the payday loan, you might find yourself buried in debt.
Alternatives to get a loan for your business or personal needs
1. Credit cards. Over 70 percent of Americans have at least one credit card. This is already part of the system of every American so why change now? Why take out a payday loan when you can swipe your expenses in your plastic money? Credit card interests plus the banking fee are not cheap. But these are still cheaper compared to getting a payday loan. If you have already maxed out your credit limit, try to appeal for a higher credit limit. But this only works if you have a good track record of paying your credit card bills. You can also apply for another credit card.
2. Bank loans. People usually think that bank loans entail a large amount of money i.e. business capital, house equity, etc. But there are small short-term loans out there. Banks are always the best bet because the loan is done properly, well recorded and the bank is covered under existing laws.
3. Do extra work. Craigslist has a great supply of jobs you didn’t think existed—but jobs you can do nonetheless. Find something that interests you: writing, drawing, painting, walking the dogs, etc. There is an endless supply of odd jobs and exciting tasks that you can do for extra cash. Perhaps you can give up a few hours of your social media time and use those to earn more money.
4. Sell stuff or services. The most common things left at home that you don’t need actually need anymore are clothes. Most people keep clothes that no longer fit in the hopes that these would fit again. Perhaps it’s about time to move on and sell those. Rummage through your closet and cabinets and find things that you can sell through e-bay or by means of a garage sale—although the latter means you have to invest time because you have to be in the place where the garage sale is happening, which is most likely your garage or home. You may also sell services, like driving an Uber. Or you can enrol yourself in the Airbnb, where people can sleep in your home and pay for the lodging.
5. Sacrifice luxury. If you are used to eating in a restaurant every week, why don’t you try cooking at home? This way, you don’t just save up on food, you can also learn a life skill. Cooking is definitely a life skill since food is one of a person’s basic needs.
6. Save. This is a practical lesson that not a lot of people do. Most people are very reactive. They only find monetary means when they need it. But if you had saved some money since you started working, perhaps when you find yourself in a bind, it would not be too much of a problem.
Aside from those, before getting a loan, you need to ask yourself, " what legal structure is best for my business?" This will help you save on taxes and the business itself.
When you are in need of some extra cash, you have to ask yourself if a payday loan is actually worth the risk. If it is between life and death, then maybe—but if there are other options, why take the risk? When you put things in paper, payday loans are just too expensive for people who live from pay check to pay check to handle. Don’t always trust the easy way out. Instead, find the most practical way out.