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Millions of Americans are struggling to make ends meet. According to a survey From First National Bank of Omaha released earlier this year, 49% of American adults expected to live paycheck after paycheck in 2020, and without a doubt the pandemic has only made matters worse. In July, Pew reported that nearly 12 million Americans rely on payday loans every year.
In a pinch, a payday loan can seem like an easy solution if you are strapped for cash. You usually need proof of income and ID, and you can get a small loan on the spot. But read the fine print and you will see that these loans are loaded with hidden fees and high interest rates as they are unfortunately marketed to people who are in dire straits and have few options to get an affordable loan. from a reputable lender.
GeenDay Payday are considered a form of predatory lending by ACLU, and many states have legislation pending to impose interest rate caps and other regulations on how much lenders can charge. More recently, Nebraska passed a law lowering the interest rate cap from 400% to 36%. While 36% is more expensive than the average APR credit cardThis is a great improvement for many borrowers who are struggling to repay these loans.
How payday loans work
Often times, people will visit physical locations to apply for a payday loan in person. To complete an application, you will need to have recent pay stubs that prove your income. Your payday loan can be Insecure, or the lender can use your income as collateral, giving them the right to garnish your paycheck if you don’t pay it back.
If you have a credit history, the lender will withdraw your credit report, which will result in a Hard shot, and make a decision.
After you get your money (usually the same day), you usually have less than 30 days to pay off the loan in full, plus finance charges. It’s very different from a traditional installment loan, where you pay off the debt over a few months or even years.
The pitfalls of payday loans
While payday loans can be a quick way to get the money you need, the interest rates are sky-high. Currently, lenders are not required by law to verify that you are able to pay off those exorbitant finance charges and fees, let alone the money you borrow.
And the consequences if you can’t pay it back are serious: fees and charges will vary depending on how much you borrow and where you live. In some unregulated states, you could pay more than 500% interest on a short-term loan of a few hundred dollars, which increases over time when you can’t pay off the balance.
Worse yet, when payday loans are secured by your paycheck, you can open up access to allow lenders to garnish your paycheck, making it nearly impossible to move forward.
Alternatives to payday loans
If you can, avoid payday loans and consider low-interest options instead. This could include borrowing money from a family member and paying it back, taking out a Personal loan or try to negotiate a payment plan with your debtor.
If neither of these options is viable, you may consider using your credit card, either by simply swiping it or taking out a cash advance (which usually has a fee of around 5% or more). While credit cards have some of the highest interest rates, they’re still cheaper than what you could afford if you took out a payday loan that you can’t afford to pay off.
If you can’t pay off your credit card balance in full, you can still protect your credit score by make minimum payments until you are in a better financial situation.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.