5 Warnings When Considering Payday Loans

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Payday loans are short-term unsecured loans that are often referred to as “cash advances”. They are generally provided by non-traditional financial companies and can be very useful for people in urgent need of cash or with a bad credit. However, you need to be careful with payday loans, especially the online ones. Here are some tips to help you recognize scams and make the right choice regarding your finances.

Beware of the high interest rates

Payday loans are extremely expensive. Although the loan amounts can be very low (around $50 to $1,000), the interest rates are ridiculously prohibitive. In fact, the annual percentage rate (APR) can be more than 500%, and is often communicated as a dollar amount per $100 borrowed (ex: $20 per $100). Often times you get to rollover the loan if you need the money beyond the original lending period. However you might end up paying interest that is higher than the original amount loaned. Therefore make sure you reimburse the funds as soon as you can.

Always read the fine print

With any contract, it is always in your best interest to read the fine print. Several companies have been known to abuse customers by failing to communicate the expensive fees charged in case of late payment. Often times, interest is also charged on those additional fees, making the loan balloon to unsustainable levels. Therefore make sure you read carefully the terms relating to your loan to avoid been a victim of predatory and usury practices.

Do your research

The lender’ reputation is very important. Make sure you research the company before doing business with them and giving them your private information. If people have been conned in the past by this lender, chances are they have expressed their complaints online or in their community. Here are some warning signs to help you spot payday loan scams:

  • The payday loan website has lots of spelling and grammatical errors
  • The URL doesn’t match the company’s name or it is misspelled
  • You are required to pay a fee before they loan you money

Make a budget

A study by the Consumer Finance Protection Bureau found that over 80% of all payday loans get rolled-over or borrowed again. This means that most of these loans are being extended much longer than their original two-week term. If you can’t pay off the loan in the next paycheck then you can easily fall into a payday lending cycle where every paycheck gets sucked into paying off the payday loan. Therefore you should always make sure you know exactly when you will repay the loan to avoid getting caught up in the debt cycle and having your credit score affected.

Consider all alternatives

Payday loans should represent a last resort and should not be used for long-term needs. Before settling for this option, make sure you have explored all the other alternatives, such as reducing your expenses, borrowing money from family and friends or selling some of your belongings.

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