Why You Should Avoid Payday Loans in 2018
What Are Payday Loans?
A payday loan is a type of loan that people take out when they are in dire need of cash. It is a short-term loan which has some or all of the following characteristics:
- It is unsecured and requires no collateral.
- Once you provide a proof of employment, pay slips and identification documents, approval is guaranteed and cash is paid on the very same day.
- The loan period is usually from 15 to 31 days.
- Payment is to be made from your next pay check.
- The average APR is around 400%.
These loans should be taken only when you need money urgently and you are absolutely sure that you can repay the entire loan on time. If not, you can easily get into a debt cycle because on the pay day, lenders will charge you only the rates and you will need to pay back the entire amount next month (the loan plus the rates).
This is the most common way to get into a debt cycle and for this reason, these lenders don’t perform a credit check and don’t request income history. Their only goal is that you take the loan so that they can charge you as much money as they can. For this reason, payday loans are not allowed in some states (District of Columbia, Connecticut, Maryland, Massachusetts, Pennsylvania, Vermont, West Virginia).
What Are Auto Title Loans?
In theory, auto title loans are a type of secured loans. But in practice, they are much different.
These are the basic features of auto title loans:
- Auto title loans require that your car title is used as collateral. In other words, if you fail to repay the loan on time, your car will be taken from you.
- The amount of loan is usually only around 40% of your car’s worth.
- The average APR is around 300%, which is close to payday loans.
- Lenders do not perform a hard inquiry on your credit.
Again, like with payday loans, auto title loans are given without performing a credit check and their APR is astronomical. This is exactly what gets people into a debt cycle.
Even though many people who have a bad credit score and need money urgently opt for payday and auto title loans, we highly recommend against taking them.
Are There Any Alternatives?
Actually, there are. Lenders who offer payday loans try to manipulate people into believing that they are their only option, while this is not true at all.
- Personal Loans
Elite Personal Finance and many other personal finance websites claim that the lending market is becoming more flexible. This means that today you can get a reasonable personal loan even if you have bad credit. This will take some shopping around and comparing offers but it will save you a lot of money and stress in the long run.
Personal loans are used when you need to cover medical bills, make a big purchase, fund unexpected expenses and for many other purposes. These loans are offered with no collateral and at much better terms than the previous two types of loans. The APR ranges from 5% to 36%, which is more than enough to consider personal loans over the other two.
You can get personal loans at a bank or online lending company. Some of the best online lenders for people with bad credit are:
- OneMain Financial
They will give you a personal loan at a much lower interest rate. Also, you can get a considerably higher amount of money and better overall terms if you only take some time to search for personal loans, shop around and compare all the offers.
Take a look at the list of bad credit loan offers by The Simple Dollar.
- Other Alternatives
Another option for you to consider is to get a cosigner for your loan. This will give you significantly better terms as the lender will consider your cosigner’s credit instead of yours. However, make sure that you pay the loan back on time if you don’t want to bury your friendship with that person.
Also, you can take a secured loan, which requires that you pledge some asset as collateral for the loan, for example, your property or car. However, unlike auto title loans, the APR of secured loans is up to 36%. In addition, the amount that you can borrow goes up to $50,000, depending on your credit and overall financial situation. Lenders feel much safer when you secure the loan with your asset, so they are ready to give you much better terms.
Finally, you can entirely avoid getting a loan by borrowing money from a friend or relative. In addition, you can ask for a salary advance at work and see how it goes. Who knows, your boss might like you after all.
In case you have bad credit, don’t fall for payday or auto title loans. These are predatory loans that will very likely get you into a debt cycle.
Instead, search for alternatives such as personal loans for bad credit. Also, you can get a co-signed or secured loan or simply borrow money.
There are enough more affordable alternatives which will cost you much less money and nerves both short- and long-term.