A payday loan is a type of short-term loan in which a lender will provide high-interest credit based on your income. Its main purpose is usually to cover a part of your next paycheck. These loans are also known as cash advance loans or advance check loans, and they are advertised as short-term emergency relief. However, due to their high borrowing costs, these services could do more harm than good. Many borrowers apply for these short-term loans because they want to avoid asking friends or family for money, their credit cards are exhausted, and because loans are easy to obtain.
To qualify, customers only need a deposit and a checking account. Payday loans are typically used to cover routine living expenses, such as car payments, mortgages, credit card payments, utilities, food and rent. These small, high-cost loans typically charge triple-digit annual percentage rates (APR), and payments are usually due within two weeks or close to your next payday. Payday loans are designed to trap you in a debt cycle. When an emergency happens and you have poor credit and you don't have savings, it may seem like you have no other choice. The Military Lending Act (MLA) provides expanded protections for military personnel and their families.
It includes a 36% Military Annual Percentage Rate (MAPR) cap for a wider range of credit products, including payday loans, vehicle title loans, application loans, deposit advance loans, installment loans and lines of credit open without guarantee. Two popular cash advance apps, Earnin and Dave, position themselves as alternatives to predatory payday lenders. If you've exhausted all options, salary or payroll advances should be considered before applying for a payday loan. Here you'll find everything you need to consider before you apply for a payday loan or use a cash advance app, plus financing alternatives and financial strategies to help you avoid both. A payday loan is not the only solution to handling an emergency bill or paying off another debt. Payday loans negatively affect your credit, any savings you might have had, and may even cause you to take you to court.
They can also lead to a debt cycle that is almost impossible to get out of. Some states do not have payday loans because these loans are not allowed by state law or because payday lenders have decided not to do business at the interest rate and charges allowed in those states. The CFPB found that 20% of payday borrowers fail to honor their loans, and more than 80% of payday loans contracted by borrowers were extended or re-borrowed within 30 days. Depending on where you live, you can get a payday loan online or through a physical branch with a payday lender. Payday lenders rely on regular customers, often low-income minorities, who charge exorbitant compound interest on cash advances. Annual percentage rates for short-term payday loans can reach three figures or even four figures. I want to recommend two good alternatives to try to avoid payday loans: salary or payroll advances.
These can help you meet your immediate cash needs until you receive your next paycheck without trapping you in a debt cycle.
