There has been a lot of buzz lately surrounding quick cash loans and the payday loan shops that offer them. The media and advocate groups demonize them while the low income citizens still turn to these types of loans due to the lack of viable alternatives. While the truth may not be so clear, payday loans pose a high risk especially to people with the inability to repay them on their next paycheck and can result in exorbitant annual fees.
What is a payday loan?
Quick cash loans are usually offered by small businesses which are not banks to people who are in urgent need of money. The lenders usually offer anything from 50 dollars to a few hundred dollars, and they do not check the credit score of the borrower. The name of payday loans comes from the fact that the lender will give a certain amount of money to the borrower which agrees to pay the sum plus the afferent fees at his or her next paycheck.
These quick cash loans shops are usually located in low income neighborhoods where people are most likely to get them. While payday loans may seem like a quick way to access money in emergency situations, there are many pitfalls which can lead to repeat borrowing and a never-ending circle of debt.
Why do people get them?
Because payday lenders do not check the credit score of the borrower, this type of loan appeals to low income citizens who cannot qualify for a regular loan at a bank. The sums of money are also quite small and the perceived risk from the borrower is reduced. The problem with these quick cash loans is that lenders typically charge high interest rates, the norm being somewhere around 15 dollars for each 100 dollars borrowed. While these fees may not appear to be high to people desperate to pay the rent in order to avoid being kicked out or have a service turned off, most borrowers are unable to pay the sum at their next check and so they have to roll over the amount for the next one, paying just the fees. This can quickly amount to amounts many times the original sum that was borrowed.
Reasons why avoiding quick cash loans is best
The main problem with taking payday loans is that most people who turn to this solution are the ones who barely make ends meet. They have a low salary and they need the money for an emergency or to pay the rent or another debt. Just as mentioned above, typical rates can be 15% per month or even higher. The problem here is that many people who apply for a payday loan have such a low income that they cannot cover monthly expenses such as rent, food, utilities, etc.
So if their income is so low that it cannot cover basic expenses, how can they afford to repay the payday loan? Well, most can’t repay the loan on time and so they are forced to refinance, paying off the monthly fee and then extending the loan, entering a repeat borrowing cycle which can result in paying interest rates which can reach three or even four digit sums within a year.
While not all payday lenders are the evil financial predators the mass media tends to describe them as, they cannot offer a proper solution to people unable to make ends meet. The interest rates and the high risk of becoming a repeat borrower are the main reasons to avoid these types of loans altogether. It is better to save a few dollars each month into an emergency savings account than to turn to quick cash loans.