A payday loan also called a “cash advance” or “check advance” loan, is a type of unsecured personal loan based on how much you earn in your paycheck. These loans charge borrowers with high interest and have short-term repayment demands.
Due to their extremely high-interest rates, payday loans can keep you in a cycle of debt. Payday loan lenders usually don’t consider the borrower’s ability to repay and often charge added fees through hidden provisions. Read on to learn why payday loans are not typically an ideal option and to see some better loan alternatives.
How Payday Loans Work
There is a limit on how much you can borrow in most cases. The amount can range from $300 to $1,000, with $500 typically being the most common amount.
Payday lenders charge all borrowers the same interest rate. It can be as high as 780% annual percentage rate (APR), with an average payday loan running as high as nearly 400% APR.
Payday loans must be paid back once you get your next paycheck. The loan term usually goes from two weeks to a month.
A regular personal loan allows you to pay back the money borrowed in installments. With payday loans however, you will most likely have to pay back the interest and principal all at once. This amount is usually more than what your budget can handle.
When taking out a payday loan, you sign a check or document that permits the lender to take money out of your bank account. If you fail to repay the loan as scheduled, the lender will either cash the check or withdraw the money from your account.
Alternatives to Payday Loans
If you need to borrow money, consider the following alternatives instead of taking out a payday loan.
Create a Budget
Evaluate all your expenses, including rent, utilities, and food, and create a budget. Know how much money is coming in and how much you can afford to spend on your expenses. Then, find ways to cut down on unnecessary expenses to be more in line with your income.
Get Credit Counseling
If you need help dealing with your debt, you may need to get credit counseling. There are non-profit agencies that can offer credit advice at little to no cost. They can also help you set up a debt management plan (DMP).
Better Loan Options
Getting a personal unsecured installment loan from your local credit union is probably a better option over a payday loan. With lower interest rates and fees, they are most especially beneficial for borrowers on a tight budget. When you make on time payments, it will even help build your credit and help you qualify for lower loan rates in the future! Learn more about our Fast Cash Payday Alternative Loan here.*
*Loans of $200 to $1,000 available for terms of one to six months. An application fee of up to $20 will be charged; other fees and charges may apply. At least one month of First Financial Federal Credit Union membership is required to obtain a Payday Alternative Loan, and is open to anyone who lives, works, worships, volunteers or attends school in Monmouth or Ocean Counties. A $5 deposit in a base savings account is required for credit union membership prior to opening any other account/loan. Not all applicants qualify, subject to credit approval. Rates vary based on creditworthiness, but will not exceed 28%. Terms and conditions of this offer may be subject to change at any time.