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What Young Adults Should Know About the Dangers of Payday Loans

When you are just starting your adult life, it is very important that you make the right financial decisions. Too many people go out into the real world without the proper financial education, and without this education, they end up making decisions that affect the rest of their lives.

Overspending on everyday shopping trips, overusing credit cards, and taking out payday loans are just a few of the many common mistakes these young adults make, and they are also mistakes you should avoid. For now, I would like to inform you about the dangers of payday loans specifically and some of the alternative choices you have when you think you need a payday loan.

What is a Payday Loan?

Payday loans, also called cash advances or paycheck advances, are short-term loans (usually about two weeks) that you must repay by the time you get your next paycheck. The lender will charge you a fee plus interest on the amount you borrow, and loan you the money you need. These types of lenders usually don’t require a full credit check, which is why they are so popular with those who have bad credit and a low income. This means that the lender is taking a very large risk when they lend money, which is why payday loans have such high interest rates.

Disadvantages of Payday Loans

Some states have a limit as to how high the annual percentage rate (APR) on these loans can get, and some states don’t allow these types of loans at all. However, some states don’t restrict payday lenders, and the APR could be anywhere from 300% to 900% in some cases. Even credit cards have a better APR than this. While this may be a very easy way to get cash fast, you should be very careful because some people who take out a payday loan could end up paying more in interest than they originally had to borrow in the first place.

When a person takes out a payday loan, they write a check for the amount borrowed plus a fee that will be cashed by the lender on their next payday. If they aren’t able to repay the loan at that time, they can roll over the loan to repay it on the following payday. This is where so many people get into trouble. They continue to roll over the loan because they are unable to get by on what is left over from their paycheck, so the loan amount continues to grow with interest. This vicious cycle continues until the person is forced to take out another payday loan to pay off the first payday loan. This process leads to more debt than the persona can handle, and some are forced to go bankrupt because of their decision to take out a payday loan.

Payday loans don’t help solve the underlying problem that has lead borrowers to their financial state. It simply puts a Band-Aid on the gaping wound that is their financial situation. Instead of making this horrible decision that could affect you for the rest of your life, you should change your financial habits and make better choices for your financial future.

Alternatives to Payday Loans

There are many lower interest alternatives to payday loans. The following are just a few.

  • Credit union loans –Your local credit union may offer small, short-term loans to members.
  • Small bank loans – Some small banks offer alternatives to those looking into payday loans.
  • Advances from employers – Ask your employer for a paycheck advance instead of going to a payday lender who will charge interest.
  • Borrowing from family and friends – Don’t let your pride keep you from making the right financial choices, but also make sure you put down in writing exactly what each of you expect from this loan. You don’t want money to ruin a friendship or a family relationship.
  • Build up and emergency fund – Every household should have at least six months’ worth of expenses saved up in an emergency fund for those tough financial times. If you don’t have any savings now, find a way to save this money so you can avoid having to take out a payday loan in the future.
  • Use your credit cards only for emergencies – If you always have the option to use your credit card, you won’t have to worry about taking out a payday loan. Only use your card for emergencies or when you know you will be able to pay off the balance immediately. Not only will you avoid payday loans, but you will also be able to maintain a good credit score, which will help you in the future.

 Photo Credit: B Rosen

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