Why Payday Loans Are Bad For You and How To Avoid Them
Posted by Credit Monarch on November 6th, 2015
Payday Loans – The Horror
Bills piling up and your check is still a week or two away. This can bring you to the conclusion that you need a loan. So you go to your local payday loans / advance (same thing) store. You fill out the forms, sign and you are on your way with a check – so easy… You pay the bills and relieve yourself from the agonizing financial stress you were in. It seems as if nothing bad happened, right? Well… not exactly.
Payday Loans – The Problem
Payday loans usually takes place when the need for cash rises above the financial reasoning. In other words payday loans are simply a bad financial decision. Further more payday loans usually carries the highest APR in the loans market with a whopping average APR of 400% ($15 – $30 per $100). Since the rates are so high it is most unlikely for a borrower to be able to pay the loan while maintain normal costs of living. This leads to the main problem of payday loans known as the “Debt Trap”. This is what happens when an already financially stressed individual obtains loans etc at rates that are beyond is ability to repay.
Say you borrow $500 for two weeks from your local payday lender with a fee of $15 per $100. So $15(the fee) x5(The amount borrowed)= $75 so now you owe $575 on your next paycheck. However if things are still tight for you, you might be compelled to obtain a second loan at a cost of $75. So now you are paying $150 a month for a $500 loan !!! In most cases the lender will request access to your checking account or a check which he will deposit on your next payday before you get a chance to use it for what you need. There is much to say about the ethics of payday loans and even some government programs like the CFPB began actions to put an end to this since it causes more financial stress then relief.
Payday Loans – The Solution
However if you really need the money now, what other options are they ? Well the solution is simple, a credit card. Now even though a credit card is not a loan and its a bit harder to get approved, i promise you that we are still compering apples to apples. Just to get a perspective; if you applied for a credit card and got approved for a $500 limit (the average PD loan amount) your APR will be 9.99% – 29.99%. vs the outrageous 400% with a payday loan. Another benefit you get with a credit card is the duration of the “loan” and the fact that you don’t have to pay interest if you pay on time. A credit card can also help build your credit score so you might find yourself at a better financial situation next year.
A Good Place To Start
So now you know, a payday loan is not the recommended way to go. But how can you get a credit card if your score is damaged or non exist ? Well Credit Monarch® piled up a few good places for you to start with.
Apply for a credit card that you can easily get get approved for. A good example is Credit One Bank® Cash Back Rewards. Most people i know got approved when they applied for this credit card. The only down side is the annual fee which you pay from the credit you get after your approval (still beats payday loans by far). However if you get approved you can start establishing you credit score right away which means that you will be able to get better credit cards eventually. Applying for this card will not hurt your credit score in no way whatsoever.
Secured credit. Secured credit is great it helps you establish your credit score without the risk of going into debt. The only down side is the fact that you have to fund the account by yourself. So if you deposit $300 into a secured credit account you will get $300 credit (100% refundable) This is also a great way to achieve better financial stands while learning how to manage your funds responsibly. You can try the following links for a good place to start with secured credit.