The holiday season, while eagerly awaited, can be really stressful when you are trying to balance the budget. Parents are naturally concerned about giving their families a Christmas that they will really enjoy but the cost of dinners, entertainment, and gifts can make it a nightmare, and more so when you are a single parent trying to make ends meet as best as you can. It is at this time, you feel the need for taking out a payday loan to help to overcome the restrictions of your pocket. This is especially if you have already maxed out your credit cards and do not have a decent credit score that makes you eligible for a personal loan, a credit card balance transfer offer, or other conventional short-term loans.

Understanding Payday Loans

Payday loans, as the name suggests, are short-term loans offered by private lenders as an advance against the borrower’s next paycheck. Payday loans are typically taken to cover the gaps between living expenses and income that many people experience on a regular basis. The typical loan amount is in the range of $500-$1000. While no credit score or check is required, lenders require a valid identification, proof of regular employment, and the income details to satisfy themselves of the borrower’s repayment capacity. Payday loans are different from other forms of short-type lending like that available from LibertyLending.com as the rate of interest is very high, the fees steep, and the period of the loan very short. It is quite normal for payday loans to be even more expensive than credit card advances.

Who Takes Payday Loans?

According to Pewtrusts.org recent statistics reveal that payday loans are used by people from all over the country and from all demographics. Around 12 million Americans take recourse to payday loans to tide over shortfalls of income paying over $9 billion in fees. The average borrower earns $30,000 per year but a whopping 58% of them find it difficult to repay their loans.

Typically, payday loans are taken out for covering unexpected expenses like medical bills or vehicle repairs that can create havoc in the borrower’s finances. However, it is also seen that a majority of payday loans are taken to pay for normal monthly expenses, including groceries, mortgages, making payments for the car, utilities, credit cards, and other everyday expenses.

Accessing Payday Loans

Payday lenders are commonly found in brick-and-mortar stores throughout America. According to surveys, payday loans are available in at least 36 states, however, the use varies significantly in each. There are some states that see a very low penetration while in other states; more than 14% of the population could be using payday loans as a mode of short-term financing. This disparity in the use of payday loans is also in some ways due to the difference in the laws and regulations governing payday loans practices. Different states also impose different limits on payday loans. For example, Louisiana has a $350 loan limit; Missouri and Oklahoma limit the loans at $500 while Washington has a more generous limit of $700.

In recent times, payday loans have also become very easily available online. You just need to make an online application that is processed instantaneously and the loan proceeds sent to the borrower’s banks account directly. According to experts, the online environment makes it more likely for borrowers to fall prey to predatory practices like excessively high rates of interest, very steep fees, and unfair and non-transparent agreements and repayment terms.

Payday Loan Caveats

Payday loans have always been a topic of debate and discussion due to its rather unsavory reputation fuelled by usurious rates of interest, and high processing charges that make it virtually impossible for many borrowers to escape the debt trap. In fact, the practice of payday loans is legal in only 36 states of America. It is very common to see borrowers rolling over their payday loans instead of paying off the due balance due to the steep cost of the borrowing. A loan rollover, which is essentially a new loan covering the repayment amount of the old loan attracts new fees every time it is rolled over. For a person who has been unable to repay his first payday loan, rolling over is a surefire recipe for financial disaster.

As per the statistics released by the Consumer Financial Protection Bureau, :

·      The borrower ends up paying $520 in fees for borrowing an initial amount of $375.

·      A two-week loan attracts an average fee of $55.

·      The average payday loan requires the borrower to make a payment of $430 from his next wage to pay off his previous loan; this is 36% of his gross pay.

·      Close to 80% of the payday loans are availed of within two weeks after the borrower has paid off an earlier payday loan.

Other Options Available

Many of the borrowers habituated to payday loans are unaware that they can avail of alternatives that are less costly and permit longer periods of repayment. Typically, these comprise personal loans, credit card advances, and personal lines of credit from banks, credit unions, and even private moneylenders. Even though cash advances taken through credit cards have high rates of interest, borrowers can use them to borrow small amounts for short periods without being forced to repay within the short-term. Personal loans have a far lesser rate of interest as well as fees that are more reasonable but you need to have a good credit score to get the best terms. Personal lines of credit work in the same way as credit cards and their cost fall in between a personal loan and a cash advance.

Conclusion

Payday loans can be extremely useful for covering sudden expenses and are available very quickly and conveniently. However, the impact of high costs associated with them is often underestimated by borrowers leading to a vicious cycle of more payday loans to cover the earlier repayments. For best results, you should only take a payday loan if you are confident that you can pay it off and not get into the habit of rolling it over.