What is a Payday Loan?

Payday loans are very short-term personal loans that can range from a week to 30 days. They're mostly used for helping people in need of quick money. The main reason they're so popular is that they typically do not require a credit check, and the loans come with fast approval times.

However, payday loans are not the best option when you're in need of money. Let’s review some of the pitfalls and alternative solutions.

Why Payday Loans Aren't the Best Solution

There are several reasons why you should avoid payday loans, including:

1. High-Interest Rates and Fees

Payday loans charge astronomical amounts of interest (typically between 1% to 1.5% daily). Because of this high-interest and the short-term nature of the loan, many individuals find it hard to pay the loan back in the time allotted. This leads to borrowing even more money, causing a snowball effect of debt.

In addition to the high-interest rates, payday lenders also charge costly upfront and hidden fees. Examples include processing fees, which can be as high as 10 percent of the borrowed amount, and verification fees.

2. Vicious Debt Cycle

The greatest challenge of managing a payday loan stems from the high costs and short terms (usually a couple weeks). These expenses add up quickly over a short time, often making them extremely difficult to pay, in addition to the original borrowed amount.

As a result, borrowers take out additional loans or roll-over their current loan to cover the previous balances – leading them straight into an ongoing, vicious debt cycle.

3. Access to Your Bank Account

Lenders claim that you won’t have to post-date a check if you provide them access to your checking account. However, if it comes time to pay off the loan and you do not have funds available in your account, the lender will usually repeat their attempts to withdraw the money. This can result in multiple costly overdraft fees from your financial institution.

4. Ruins Your Credit

It can be very tempting to take out a payday loan, particularly if you have poor credit history and no cash reserve. However, just because most payday lenders don’t worry about your credit history, doesn't make borrowing money less risky.

If you can't pay off your loan on time and you don't have the lender roll your loan over, you can end up with immediate issues. Because payday lenders typically require a post-dated check before they'll issue the loan, they'll deposit the check on your next payday. If the check bounces, you may go into default, which could wind up in debt-collection and hurt your credit score.

Alternatives to Payday Loans

The easiest way to avoid payday loans is to prepare for unexpected expenses. Building up an emergency fund can be accomplished without much effort. Automated tools such as payroll deduction and automatic transfers allow you to transfer money into your savings easily. Small amounts, such as $25 per paycheck, will begin to add up quickly. When those unplanned expenses pop up, you’ll be prepared without paying expensive fees or high interest.

If you are caught without an emergency fund and need money fast, contact the credit union. As a not-for-profit financial institution, we’re here to help you make the right financial decisions. Personal loans are available with lower interest rates, more flexible terms, and without all the costly fees.

Another option, if you’re a homeowner, is a Home Equity Line of Credit (HELOC). This solution provides a larger safety net over a much longer period of time. You can borrow from your approved line of credit as you please and repay only what you borrow. Because these loans are secured, the interest rates are typically much lower than unsecured loans, such as credit cards.

We’re Here to Help!

Payday loans can seem like a viable solution to short-term, unexpected expenses. But they often become a debt trap that leaves borrowers in a worse position than when they started.

As your credit union, Eagle is here to help you navigate the complexities of financial matters. If you’re in need of a short-term loan, stop by any branch location or give us a call at (949) 588-9400. We offer a variety of options to help you overcome your financial challenges, and we’ll help find the right solution for you.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.