Payday Loan

Payday Loan: What Is It and How Best To Repay It

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Pay day loans are short term high interest loans that are given to you based on your income. The lenders are small credit merchants seeking exorbitant profits. In order to get a payday loan you have to go to the loan office with recent pay stubs so that they can verify your earnings. On the loans maturity day you have to go to the shop and pay off your loan. The loans are categorized as unsecured loans as you do not have to offer collateral in case you cannot pay it back.

Who uses payday loans?

Those who use these services are often broke individuals who need money to pay for rent or utilities. There are also those with bad or low credit who cannot qualify for credit cards or loans from major financial institutions such as banks.

This type of loan is considered predatory because lenders never consider the borrower’s ability to repay. In most cases they have hidden charges or fees that increase the loan amount. The lenders have physical stores for applications and approvals; you might have seen them as they are very recognizable. With the migration of businesses to the internet some have online stores where they offer their ‘generous’ services.

The payday loans use other terms such as:

  • Pay advance
  • Cash advance
  • Payroll loan
  • Salary loan
  • Check advance

Payday loan
Image: Monstera

Payday loans should be your last option and only used in an emergency. They tend to drag people into a vicious cycle of paying and borrowing in order to afford necessities. That is why they were classed as illegal in certain countries. The borrowers end up hurt in the end with unfair interest rates of 390% to 780% Annual Percentage Rate [APR].

There are certain assumptions about payday loans. One of the major ones being that they have high interest rates because they deal with high risk clients who might not pay. That is false because the default rates of payday loans are very low.

How do lenders advertise their services?

Lenders mainly rely on repeat customers, as stated earlier payday loans put you in a debt cycle where you rely on them. They advertise online, through mail, TVs and radio targeting listeners in need of financial assistance. It is marketed as ‘a helping hand’ and ‘helpful’ where you get the money fast.

What happens if you can’t pay on time?

If you cannot pay on time, the lenders have joyful bells going off in their ears. When you ask for a loan you have to pay a certain interest on top. An example is you pay thirty dollars for the two hundred dollars you receive. If you need an extension to be able to pay them back, you get a roll over where you have to pay twice the interest amount on top of the agreed amount. So you get an added sixty dollars. When you take this and multiply by three months, six months and a year you will realize the debt cycle is hard to get out of.

How to pay off payday loans?

Now that you have acquired the loan, you are wondering how will you pay it on time and avoid being trapped. There are several ways to pay the debt.

  1. Getting a low interest loan
Image: Mikhail Nilov

Get a debt to pay another debt sounds incredulous but it will work in your favor. When you approach a lender, you have an emergency you have to deal with such as paying rent or medical bill. Emergencies are mostly unexpected events that fall into your lap to fix and you can’t always have enough money to fix them. So you take out a cash advance loan.

Once the issue has been resolved you should go and start shopping around for better deals. Get a loan that has low interest and gives you enough time to repay. If you have great credit you can approach the bank and credit unions. If you don’t, there are other options such as asking family and friends for a loan. The risk to this is broken relationships if you aren’t able to pay back. There are also lenders who give loans to people despite bad credit scores.

  1. Payment plan

There are pay advance lenders who offer extended payments plans that you can use to pay without being burdened by the original terms. The terms and payments will be more manageable with affordable interest rates. It heavily depends on the laws where you live. You may also be granted a few extensions by the lender; maybe three or four. This option still keeps you in the debt cycle so you should use it to leave as soon as you can.

  1. Sell

The truth is in order to pay what you owe without money is to sell what you have to make extra money. In your home you probably have items that you don’t use or have grown out of. You can sell them online through sites like Ebay, Facebook market place or have a garage sale. There are many who can use the thing what you do not need.

  1. Supplement your income

Have more than one source of income dedicated to paying off your loan makes it easier to escape the debt cycle. You can look into getting passive income streams such as Affiliate marketing to make money with little hands on commitment. It can help you work on your full time job without interference. The negative side to it is that it takes time to build an audience and be recognized.

Another option is to get a part time job on top of your regular job. It sounds stressful as you may have a hard time adjusting to your regular work hours. This is a temporary situation that helps you pay the lenders and return to your regular routine. It is a necessary step to becoming debt free.

Main takeaways

  • Payday loans have a high interest
  • Payday loans are often debt traps
  • Payday loans should be the last option

Bottom Line

You have to be as careful with your financial health as you are with your physical health. Getting a payday loan without having a plan is similar to knowingly stepping into quicksand and hoping for the best. You should do your research and try to find other options such as credit unions. Another is getting free credit counseling from non-profit agencies so you can get advice and guidance. Third you have to find one that has the best APR and charges. The simplest way is changing your money habits by creating a personal budget and building an emergency fund.

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