What is a personal loan?
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Millions of Americans are struggling to make ends meet. According to a survey from the First National Bank of Omaha released earlier this year, 49% of American adults expected to live paycheck to paycheck in 2020, and there is no doubt that the pandemic has only make things worse. In July, Pew reported that nearly 12 million Americans rely on payday loans every year.
In a pinch, a payday loan may seem like an easy solution if you’re short on cash. You usually only 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 because they are unfortunately marketed to people who are in dire straits and have few options to get an affordable loan. from a reputable lender.
Payday loans are considered a form of predatory lending by ACLUand many states have pending legislation to impose interest rate caps and other regulations on how much lenders can charge. More recently, Nebraska passed a law lowering the ceiling on interest rates from 400% to 36%. While 36% is more expensive than the average credit card APR, it’s a big improvement for many borrowers who are struggling to repay these loans.
How payday loans work
Often people go to 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 without collateral, or the lender can use your income as collateral, giving them the right to garnish your wages if you don’t pay them back.
If you have a credit history, the lender will pull your credit report, resulting in a hard draw, and make a decision.
Once you receive your money (usually the same day), you usually have less than 30 days to repay the loan in full, plus finance charges. It’s markedly different from a traditional installment loan, where you pay off the debt over a few months or even years.
The pitfalls of the personal loan
Although 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 repay these charges and exorbitant finance charges, let alone the money you have borrowed.
And the consequences if you can’t repay it are serious: fees and charges vary depending on the amount you borrow and where you live. In some unregulated states, you could pay over 500% interest for a short-term loan of a few hundred dollars, which increases over time when you can’t pay off the balance.
Worse, when payday loans are secured by your paycheck, you can open access to give lenders permission to garnish your wages, making it nearly impossible to get ahead.
If you can, avoid payday loans and consider low-interest options instead. This may 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 are viable, you can consider using your credit card, either by simply swiping it or taking a cash advance (which usually carries a fee of around 5% or more). Although credit cards have some of the highest interest rates, they’re still cheaper than what you might pay if you take out a payday loan you can’t afford to pay back.
If you can’t pay off your credit card balance in full, you can still protect your credit score by making minimum payments until you’re in better financial shape.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.