Payday loans are loans for people who can’t get other types of loans. There are several reasons why that happens, but if you are using payday loans on a regular basis it’s time to get help. Because they are so expensive, payday loans put the borrower into a vicious cycle that is not easy to get out of. But the sooner that you can, the sooner you will be able to improve your finances, and obtain more generous types of credit.
How Payday Loans Work
Payday loans are essentially advances against your next paycheck. You might be motivated to take a payday loan because your last paycheck has already been spent, and it will be several days to several weeks before you will be paid again. In the meantime, you still have expenses that need to be paid before your check arrives.
This is where payday loans come into the picture. A payday lender – which is often a check cashing service – will provide you with an advance on your next paycheck. You can generally get a payday loan if you are steadily employed, and can provide a copy of a recent bank statement as well as a recent pay stub. The lender will provide you with a loan for some amount less than your next paycheck.
You will need to complete some paperwork, then provide the lender with a postdated check for an amount that is higher than the money borrowed. The lender will then provide you with cash to pay for your expenses. But on the due date you have to bring in cash in an amount matches the amount of your post dated check. When you do, the postdated check is returned to you, and the cash you bring satisfies the loan.
At first glance, this sounds like an equitable arrangement. After all, you need cash, and a payday lender is entitled to make some money by making a loan to you. But there are more than a few problems with payday loans that result in something less than a happy ending.
Why Payday Loans are Bad for You
There are all kinds of reasons why this is true, but here are some of the most important ones.
Very high interest rates. A payday lender may loan you $200, but require that you pay back $225 in 15 days. While that may seem like a small fee to pay for desperately needed cash, it works out to be an interest rate of about 300% per year. If you only use a payday loan occasionally, that may be an acceptable outcome. But that’s not how it usually works.
One payday loan leads to another, and another… This happens because the first payday loan you take has to be paid out of your next paycheck. That guarantees that your next paycheck will also be insufficient to pay your bills. That will lead to another payday loan to get an advance on your next paycheck. Soon enough, payday loans will become a way of life, and a permanent obligation.
You lose control of your income. The fundamental problem of payday loans – even more so then high interest rates – is the fact that your next paycheck is always spent before it’s earned. That means that when payday comes, you’ll be forced to take a large share of your pay and turn it over to the payday lender. If your payday loans come the consume most of your paycheck, you’ll lose total control of your income.
You can never get ahead. The payday loan system functions in a way that keeps you in perpetual debt. Because you’re borrowing for very short-term needs, it’s impossible to get ahead. The payday loan is always a short-term fix, and never a long-term solution to your financial problems.
Why People Use Payday Loans
People often become dependent on payday loans because of mistakes made early in life.
Poor credit history. This is probably the biggest reason why people use payday loans. If your credit is poor, you will not be able to get credit from conventional sources, such as bank loans, credit cards and even finance companies. You will be able to get payday loans regardless of your credit, because they are very short-term, very expensive (which is why payday lenders exist), and are secured by your paycheck. The lender doesn’t care about your credit. But you will be stuck with payday loans as your sole source of credit until your credit situation is repaired.
No savings. The circumstances that lead to dependence on payday loans often includes an absence of savings. If you never got into the habit of saving money, you can become completely dependent on credit. And if your credit goes sour, the last lending option is payday loans.
No bank relationship. This is typically caused by a poor credit history. Banks pull credit reports before new accounts are opened, and if your credit history is bad, they will refuse to give you an account. This will make it difficult to save money, and virtually impossible to build up a relationship that will enable you to apply for a low interest loan.
Clearly, you need to take decisive action and turn your credit around to be an asset rather than a liability.
You May Need Professional Help to Get Off the Payday Loan Merry-go-round
If you become dependent on payday loans, you will eventually reach a point where you cannot borrow any more money, even from a payday lender. At that point, you’ll be unable pay your bills, because you are unable to get new payday loans.
If you’re unable to satisfy a payday loan, the lender can take legal action against you. For example, since they have you provide them with a postdated check, if you are unable to come up with the cash to cover the check, the lender can deposit it and let it bounce. In some states, you can be arrested for nonpayment of the check, which will make your situation infinitely worse.
Reliance on payday loans is a clear indication of deeper credit problems, some of which we discussed earlier. The key to getting off the payday loan merry-go-round usually starts with getting your past credit problems repaired, so that your credit score will increase. At that point, you’ll be able to open a bank account, and borrow money from more conventional (and affordable) loan sources.
You may need legal representation in making this happen, particularly if you have one or more payday loans that you are unable to pay off. A credit repair company will not be able to help you with this, but a law firm that specializes in credit problems can.
If you are already experiencing payday loan problems, or if you’re even contemplating resorting to a payday loan, it’s time to sit down with a competent lawyer and discuss your options. Payday loans are a vicious cycle that is best ended as soon as possible.