Payday loans are predatory loans that provide borrowers with quick cash, and come with high borrowing costs.
Like any financial product, payday loans can be helpful if you use them responsibly. But the problem is that most people who get involved in payday loans end up in way over their heads.
The payday loan industry has ballooned in recent years to a massive industry within lending–$40 billion in payday loans were issued in 2015 according to Jefferies.
Yet payday loans, by their very nature, prey on the financially struggling. Because they give borrowers access to quick cash, payday loans have become incredibly popular among people that are in a bind and need cash now.
How they work
Payday loans operate on the basis that sometimes, you just need cash. It could be for a sudden medical expense, or an emergency car repair. Or even just to put food on the table. For people in these situations, payday loans are a lifeline. Unfortunately, this is the hook.
However, payday loans also have short payback periods. As quick as you got the cash, the terms of the loan will dictate that it be paid off in full (which whatever interest or fees came with it) in just a matter of weeks.
You can see how this is a bit of a paradox. Who’s going to be so desperate for cash one week and then be able to pay it off in full a short time later? Not many people.
Payday loans come with exorbitant fees. If you’re unable to pay back the loans right away, an avalanche will be coming your way. It’s not uncommon for the amount you end up paying back to be double or triple the amount you initially borrowed–or even worse. In some cases, people have had to take out new payday loans to pay off a previous payday loan. And the cycle continues.
Recently, however, there’s been a bit of a push back against the payday loan industry. In May, Google announced they were banning all payday loan ads on their site, and the Consumer Financial Protection Bureau has also proposed new regulations.
Alternatives for when cash is tight
If you do find yourself in a position where you really need cash, there are other options out there that you should take instead.
- Use Zebit’s interest-free credit called a ZebitLine. It helps when managing a tight budget. You can use Zebitline to finance purchases made in the Zebit Market, containing over 30,000 products and services. And the best part is, it doesn’t come with interest, fees, or a credit check.
- Get a personal installment loan. These are loans that you can get from a traditional financial institution, like a bank. Personal loans perform a credit check and usually come with fixed interest rates, and have limits to the amount of fees they can charge.
- Ask for a pay advance. If your company is accommodating, see if they’d be willing to help you out with an advance in pay. Some companies even have lending programs for employees in this exact position. It never hurts to ask your manager or HR department for additional, non-hurtful resources.
- Borrow from your retirement accounts. This is not a preferred option, but it’s still better than payday loans. You’re allowed to borrow from your Roth (IRA) once per year with no penalties, so long as you put the money back within 90 days. Some employers will also let you borrow up to half your balance of your 401(k) account. Just remember that this is your retirement livelihood. Don’t make a habit of borrowing from your 401(K) regularly.
- Borrow from friends or family. Do not let pride get in the way. If you trust the lender, and trust yourself to pay it back, this is a very affordable way to make ends meet. Just make sure you pay the loan back in the agreed upon timeline so you do not damage the relationship.
For more information on payday loan traps, visit the CFPB’s website for consumers.