Payday-loan regulations have recently changed again, putting the high-interest loans back at the forefront of political and financial discussions. One of the most notable changes involves the removal of the interest rate cap, which had prevented lenders from charging exorbitant interest rates. Consumers will pay more for them now, but that doesn’t mean payday loans are a bad idea in all situations. Let’s take a closer look.
Payday Loans Are Easy to Get
Although eligibility requirements vary from lender to lender, they are usually very lenient. This means that payday loans are the easiest loans for consumers to get. Common criteria to get a loan include the ability to provide proof of income, checking account information and a valid photo I.D. People who don’t qualify for other types of loans may still quality for payday loans, which can make them an attractive option.
You May Pay Exorbitant Interest Rates
According to PayDay Loan Consumer Information, payday lenders charge outrageous interest rates ranging from 390 to 780% APR. In some states, interest rates can even go higher. To put things in perspective, interest rates for credit cards average about 16% APR. Interest rates for other types of loans, such as a personal loan, car loan or mortgage, are even lower.
Why is this important? The interest rate dictates how much you will pay for the credit extended to you. Time is also a factor. If you pay off your loan quickly, you will pay less. It’s possible to borrow $100 from a payday lender and only pay $10 in interest (depending on interest rate) if you pay back the loan within two weeks. If you can’t pay it back, or if you have to take out another loan, you will pay more.
It’s Easy to Fall into the Rollover Option Trap
Payday loans really wreak havoc on the wallet when borrowers have to roll over their loans each pay period in order to survive — and it happens more than you may realize. Approximately 25% of payday loans are rolled over nine times or more. This results in hundreds of dollars in finance charges that only make it more difficult for borrowers to get back on their feet.
Although taking out a payday loan is not the best move financially, it’s not the worst. Payday loans can have a huge positive impact in the lives of those who can’t get money elsewhere. What’s more, they have minimal financial impact if they’re used properly. The key is to only borrow what you can afford to pay back within one loan cycle.
~Here’s to Your Success!