In an emergency situation most families do not have enough of a safety cushion in savings to pay for unexpected expenses. A large portion of American families live paycheck to paycheck and fall short of being able to cover everyday necessities or unexpected emergency expenses. When you need extra cash to cover your necessities for many, payday loans seem like a good option.
In most cases families find themselves with very little options, when cash runs out and they need to cover necessary ongoing expenses for food, repairs or supplies. The unfortunate problem with doing this, is that in most cases they leave families in worst states than ever before. Very rarely do payday loans serve to help out the overall financial situation of borrowers.
How Do Most Payday Loans Work?
Payday loans are short term loans that are available in most cases when the borrower can show they have employment. When a person obtains a payday loan they agree to borrow a specified amount of money for a short term with an agreement that they will repay the loan plus the finances charges. The payday loan company will agree to lend the borrower the money in exchange for being paid the loan amount plus the finance charges on the borrower’s next pay day. In order to ensure that they are repaid the lender will generally require a post-dated check that provides for the payment of the loan with the finances charges that is dated for the borrower’s next pay date. Instead of a post-dated check the lender may instead have the borrower agree to an automatic withdraw of the loan amount and finance charges on the next pay date.
The payday loans are generally for small amounts and are intended to be repaid when the party receives their next employment check. The average amounts for payday loans are typically from $100 to $2500. Payday loans are intended to be paid within 1 to 2 weeks and carry high interest rates and significant late penalties when the party fails to repay the loan as agreed.
The interest rates for payday loans range on average from 390% to 700%. The finance charges for the payday loan are generally either calculated by either a charge per every set amount borrowed or a percentage of the total amount of the loan borrowed.
Per Amount Borrowed- For example some companies will charge $30 for every $100 borrowed on a payday loan. In this case if you borrowed $200 you will owe:
$30 + $30 +$200= $260 (Amount to be repaid on your next pay day)
Percentage Borrowed-Other companies will charge a percentage of the total loan. If you borrowed $200 and they charged 35% of total loan then you would owe:
$200 X 35%=$70 + $200= $270 (Amount to be repaid on your next pay day)
The lender in most cases will prefer that the borrower renews the loan for an additional period since the borrower will have to pay the finances charges for the initial term along with new finances charges for the new term.
The Vicious Cycle of Payday Loans
Payday loans in general create a vicious cycle where you continue to renew the loan each pay cycle and incur continuous finances charges. Most people who obtain payday loans are struggling to cover their everyday necessities and taking a loan with high finance charges will only leave that party more strapped for cash on their next pay day cycle. When the borrower has to pay high finance charges on their next pay date, this will only leave them with a smaller check to cover their ongoing monthly expenses which results in the payday loan being renewed. With every renewal of the loan the borrower is left with less and less cash to cover their ongoing monthly expenses for the month.
The borrower in this situation may need to resort to eventually taking out a second payday loan in order to cover their monthly ongoing expenses. This again will only lead to an overall decline in the monthly amounts available to pay their monthly expenses since they will incur additional finance charges.
It is always important to seek an alternative to payday loans if possible. Some options that you may want to explore are:
- Loans from Credit Union or Bank– as an alternative try to contact your local credit union or bank to see if they offer short term loans. Generally these loans are offered at better interest rates than the loans offered through payday companies.
- Credit Card-Look at the rates being offered by your credit cards for cash advances. They may provide a much better rate than most payday loan companies. Look at the overall finance charges of the credit card to determine if they provide a better alternative than payday loans.
Payday loans should be avoided if possible. They rarely provide the needed financial relief that consumers are looking for. Before deciding to obtain a payday loan seek other alternatives.