Understanding the Benefits and Risks of Payday Loans

Before considering a payday loan, it’s important to understand how they work. Typically, the borrower writes a check to the payday loan company for the amount of the loan along with additional fees. The loan issuer then deposits the amount of the loan into the borrower’s account or issues cash. The borrower pays back the full amount after their next paycheck when the lender cashes the original check.

While payday loans can help consumers handle sudden emergencies, they’re expensive. They often carry large interest rates and fees, and many borrowers aren’t able to repay their loans on schedule. That leads to more fees and more interest.

Your unique financial circumstances will determine whether a payday loan is an appropriate choice, and this article is not intended as financial advice. With that said, asking these questions may be helpful for determining whether a payday loan makes sense:

• Can I get money through other means? Payday loans usually have extremely high interest rates. Other financial tools — such as personal loans and credit card cash advances — are typically less expensive, though they may not provide access to cash as quickly. If your financial situation is not an emergency, look into all available alternatives before applying for a payday loan.
• Do I have a plan to repay the loan? Like all loans, payday loans are more expensive when paid over a longer period of time. Before taking out a loan, make a plan for repaying it as quickly as possible. Honestly assess your finances — make sure you’ll be able to make each scheduled payment, even if another financial emergency occurs.
• Do I understand the terms of the loan agreement? Payday lenders often focus on the amount of the loan and the speed of the deposit. While you may need fast access to cash, make sure to read the full agreement before agreeing to the loan. Understand the repayment period, interest rate, and additional fees that could add to the total cost.

Always research carefully before opening up a new loan. Look at a variety of lenders, keeping notes about their interest rates and fees. While you’re researching, look for alternatives to payday loans — some personal loans issue funds within several days, which could help you avoid a financial emergency without agreeing to an extremely high interest rate.

Researching Cash Advance Loans and Other Options

As discussed above, payday loans are expensive. To keep costs down, review every option available. Look for advertised interest rates. Remember, some lenders have additional fees that may not be included in their advertised interest rates; find out the full cost of the loan before making your decision.

Typically, payday loan lenders do not run a credit check. This means that consumers can often take out cash advance loans, even if they have poor credit or no credit. If you have established credit and you’re current on all of your payments, you might consider taking out a personal loan or credit card cash advance to reduce the cost of borrowing.

Once again, you’ll need to research carefully before opening any new line of credit. For personal loans, check interest rates (often listed as Annual Percentage Rates or APRs) and look for the least expensive option. Some consumers can find lower interest rates by entering loans with a cosigner. A cosigner is another person — a trusted friend or family member — who agrees to assume your debt if you’re unable to repay it. A cosigner may help you find a loan even if you have poor credit.

Before Opening a Loan, Do Your Homework

If you decide to take out a payday loan, try to avoid taking more cash than you need for your emergency. Some lenders will offer borrowers a greater amount of cash, but remember that you’ll have to pay that money back with interest under a set repayment schedule.

It’s possible to use payday loans responsibly, but if you need cash quickly, the safest course is to review every financial tool available. Look online for personal loans, credit card offers, and cash advance loan sites. Review them carefully. Try to determine the exact cost of each option, and make sure you understand the terms of repayment. By comparing quotes through online resources, you can get the money you need for emergencies without overpaying.