Cheap Payday Loans - Traps to avoid!
The first thing to understand about cheap payday loans is that rarely, in the long run, are they truly “cheap.” However, if you’re having some cash flow problems and are in need of some funds quickly before your paycheck comes, they can certainly be an option to consider.
The reason why cheap payday loans wind up costing more than you might think is because of the interest rates lenders charge for the convenience of allowing you access to the funds you expect to get through your check early. In essence, they are taking a small risk that you might not get your check.
How do Cheap Payday Loans Work?
When first working with a payday loan provider, you will find that while they will probably need some key pieces of information before they agree to make the loan. Specifically, they’ll ask for paystubs from your employer and my even need to do a credit check depending on the terms of the loan.
Once they agree to make you a loan, you will generally have to agree to have your paycheck direct deposited to the lenders’ account. That way they can be guaranteed that they will receive at least their principal back, and will also collect any fees associated with the loan.
What are the Interest Rates?
As mentioned earlier, cheap payday loans are actually one of the most expensive sources of money out there. Rates and fees will be determined by two principle factors, specifically:
- How much you’re borrowing
- How long you keep it for
If, for example, you borrow a relatively small amount (say $250) for seven days, you will probably pay anywhere from 20 to 45% rate (calculated yearly) on those funds. At the end of the seven days, that $250 could cost you $350!
If you borrow a higher amount for longer (say $1,500 for 31 days) the interest rate can be as high as 500% (calculated yearly)! Your $1,500 could quickly become over $2,500 or more!
Sources of Cheap Payday Loans
Despite the high interest rates, you may find yourself in a situation where a cheap payday loan in the only option -- perhaps you have an unexpected medical expense or unexpectedly high utility bill. If you are going to look in to these types of loans, here are some sources to consider:
- First, before looking to the many vendors offering payday loans, consider whether you can approach your employer for an advance on your paycheck. Many employers have policies for just these types of situations and are more than willing to help out their loyal workers – at much lower rates than other lenders!
- A second option might be to contact the bank where you have your personal checking and/or savings account. Many financial institutions offer short term loans to their customers at far more reasonable rates than you might find with payday advance companies.
- Third, consider looking at your existing sources of credit. While cash advances from your credit cards will carry high interest rates, they will almost always be less expensive in the long run.
- Finally, if you are going to pursue a cheap payday loan, shop around for good interest rates. Some of the vendors to consider include:
In general, if you can find a rate of 20% or less with no other unfavorable conditions, it’s likely to be the best you’ll be able to get.
As you’re considering cheap payday loans to deal with unexpected expenses bear in mind that these should be short-term solutions. If you find yourself turning to payday advance services again and again, it’s probably time to take a more comprehensive look at your financial situation.
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