Contrary to popular belief, payday loans are not a magical cash solution to a financial emergency. Not only are interest rates extraordinarily high, but few people are able to actually pay off the loan once payment is due, creating an incredibly vicious cycle of debt.
What’s involved in a payday loan? It begins by completing a short application, and writing a check dated for the next payday to receive a lower amount of money in return. Fees and interest generally apply to every $100 which are needed, and they’re taken out before the borrower is given any money. Essentially, a loan for $300 will only actually amount to $210 in cash. If the borrower has no money the loan will need to be renewed and the balance will be left outstanding.
High Interest Rates
With payday loans, interest rates can climb to excessive heights. Annual interest rates come as high as 300%, but that’s not the worst of it. The interest rate on a payday loan depends on the length of the loan.
The shorter amount of time you take the loan out, the higher the interest rate. For instance, according to the calculator provided by the Missouri Attorney General, a 7 day $500 loan with a fee of $150 can result in an effective interest rate of 1,560%.
They Can Impact Your Credit Score
Even if you stay on top of
all the payments, the types of credit you have are taken into account when a credit score is calculated. A payday loan can actually have more of a negative effect on a credit score than credit cards or other major loans. Though there may not be a huge drop after applying for a payday loan, it could result in hefty problems later.
They’re Difficult to Pay Off
It doesn’t take long for a payday loan company to request a payment from a checking account. Sometimes in as little as three days, they’ll ask for a check. When they do, you’ll not only need to pay the bill, but the fee associated with it. If there isn’t enough money in the account to pay for the bill, it’s possible to ask the lender to “churn” the loan if you’re willing to repay the fees. This generally causes a domino affect which could result in a person paying far more than they initially borrowed.
Instead of taking out a payday loan, it may be a better idea to make a good income property investment using Jason Hartman’s strategy to make the money work for you. Regardless of the situation, avoid payday loans to avoid throwing money away. (Top Image: Flickr | PinkMoose)
The Young Wealth Team