[The following is a guest post about the dangers of short-term loans.]
If you are facing a financial crisis, a payday loan may seem like the perfect solution to your problem. They usually offer to provide you with instant cash that may be in your bank account in just a matter of hours. They also promote the fact that they will lend to anyone with a steady job, even if you have no credit, or poor credit.
While this may seem like the answer to your financial problems, there are some things you should know about payday loans before making your final decision. Otherwise, what may seem like the perfect solution, may only add to your financial problems.
How Short-term/Payday Loans Work
A payday loan company is likely to offer you a loan of up to $2,000 that you can spend on anything you want to. Through this loan contract, you agree to make regular payments to the lender until your loan is paid in full. They will attach various fees to your loan that you must also pay back in full. The application process is very easy and these companies do not do any type of credit check to see if you qualify for approval. As long as you have a steady income, you will probably be approved.
You may ask yourself why payday loan companies offer loans to people with little or poor credit when other lenders will not. This is because they set up an agreement with you where they are practically guaranteed to get their money back. This is because you agree to allow the payday loan company to withdraw the fund directly from your regular pay check or your bank account. These funds will then be directly forwarded to the payday loan company.
It is very important that you realize the when you agree to a payday loan, you are authorizing the company to take funds directly from your pay check or bank account to cover your debt. Once you make the agreement, these payments will be automatic and there will be nothing you can do to stop the payments. This means that you will have fewer funds available to you every week until the loan is paid off.
If you are having the money directly deducted from your bank account and you do not have sufficient funds available, you are likely to receive an additional fee from your bank.
While the government has set some strict guidelines in place for payday loans, you will still repay a substantial amount more than you initially borrowed. Right from the start you will be charged a 20% establishment fee just for taking the loan out. If you are taking out a $2,000 loan, the establishment fee would be $400. You will also pay a 4% monthly account fee on the balance you still owe. This will add up to a lot of extra charges.
For example, if you obtain a loan for $2,000 and plan to repay the loan over 16 biweekly installments, you will owe $190 every two weeks. This will equate to a total repayment of $3.040.00, which means you will be paying more than $1,000 more on a $2,000 loan. This does not even include late fees if you are ever late with one or more payment.
Alternatives To Expensive Short-term Loans
There are several alternatives to payday loans that you may want to consider. You definitely want to contact your lenders first and see if you can make alternative payment arrangements with them, so you do not have to take out a loan. You may also be able to borrow a small amount from a friend or family member and pay it back over a set period of time.
There are also some other loan alternatives, such as a standard bank loan or you may be able to obtain a low-interest credit card that you can use for some of your expenses. If you are low-income you may be eligible for specialty or Centrelink loans from bank and charity partnerships, such as the StepUp Loan and the No Interest Loans Scheme. If you receive payments from Centrelink, you may be eligible for an advance payment to help offset some of your current bills.
While taking out a payday loan may seem like a good idea initially, keep in mind how much you will need to repay in added fees. If you are not careful, this type of loan can actually add more financial stress on you than you currently have. This is because you will have to go with several weeks or months of decreased pay checks to cover all of your other expenses.
If you do obtain a payday loan make sure you read the contract through completely and that you are certain you will have the ability to repay the loan.