The Truth About Payday and Short-Term Loans

You’ve seen the ads online, on TV, and heard them on the radio. It seems like easy money is just a click or call away. The allure of this easy access to cash is what makes the multi-billion dollar per year payday loan industry tick. What they don’t tell you in those ads is that some have APR rates in the thousands of percent.  A $500 loan could end up costing you thousands if you are not careful.

What You Need to Know

Always read the fine print. The interest rate itself may not be as high as it seems so it is important to add in the fees that go along with the loan. The lender is required to provide this combined rate which is known as APR (annual percentage rate). The APR on any loan, but also payday loans, includes all fees and calculates it based on the percentage of actual cost on the money borrowed. This is the true cost of the loan and the way that you can compare lenders and loan programs on an apples-to-apples basis.

What is a Title Loan?

Often times title loans carry lower interest rates since you are providing your car as collateral for the loan. Again, make sure you figure out the APR so that you can accurately weigh your other options. It is important to make sure that you can fully pay back the loan, because, if not, you may end up with a tow truck legally towing your car away. We’ve seen this happen all too often, so please use extra care when considering title loans.

Is a PayDay Loan Right for you?

This is, of course, a personal choice for the individual. The best way to approach a short term cash shortage is to find the lowest cost of borrowing. If you don’t have any other options, and it will make the difference between feeding your family or not, who would anyone be to judge? However, it is important to consider as many other possibilities before committing to a short-term loan, whether a bank loan, payday loan, or title loan.  

Alternatives to Payday and Short-Term Loans

Getting a small loan from a credit union or small loan company: Find out terms before you make a decision by shopping around and comparing all available offers. For example, some banks will offer a short-term loan at a competitive rate if it's a small amount. Local organizations often make small business loans to people. There are also cash advances available through credit cards, but those could have a higher interest rate than other sources.

Find the lowest cost credit offer: Comparing the APR and finance charges is incredibly important. There are certain protections for certain places and people. Military personnel have protections against super-high fees or rates. Consumers in some states and District of Columbia have protections dealing with limits on rates. Although there are protections in place, payday loans can still be expensive, especially if you roll over loans and have to pay additional fees. Alternative choices for credit offers may come with lower rates and costs.

Get in contact with your creditors or loan servicer immediately if you are having troubles making payments. Many may be willing to work with you if they believe you are acting in good faith. Extensions may be available to you, but always make sure to find out what the charges would be for that service, whether a late charge, additional finance charge, or increased interest rate. 

Consumer credit counseling service companies in your local area may be of good help. They can help you work out debt repayment plans with creditors or even just developing a budget. There are many Non-profit groups in each state that offer credit guidance for no or low costs.

Create a realistic budget: Try to avoid unnecessary spending while trying to build up your savings. Small deposits into your savings, over buying that cup of coffee each day. Savings plans can help you to avoid borrowing for emergencies.

Overdraft Protection: Find out if you have or can get this on your checking account. This can help you, if you are regularly using most or all of your account funds, and can further protect you from credit problems. Make sure to find out the terms for both what it costs and what it covers.

Conclusion: Short-Term Loans Can Be Helpful

In short, payday and short-term loans can provide valuable assistance. The key is to be informed and careful if you decide to go this route. If you are in difficult circumstances but unable or unwilling to borrow money, you may consider other assistance options that can alleviate your outgoing expenses, like housing assistance, scholarships, or food assistance. If your housing and food expenses are covered, you can use that saved money for other resources and may not have to consider borrowing money at all.

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