For many Americans, managing finances is a paycheck-to-paycheck way of life. Even those who carefully balance their expenses with tight incomes can easily run into trouble when unexpected events arise.
When people face emergency expenses like car repairs or hospital visits, but they don’t have the cash on hand to pay for them, they’re forced to look for a way to make ends meet. Payday loans are one quick-fix option to pay for life’s unexpected necessities.
These short-term loans, also called cash-advance loans, work by providing an immediate loan for an amount based on a portion of your expected paycheck. The lender, usually a small credit merchant, essentially uses an upcoming paycheck as collateral. They consider the amount of the borrower’s wages and their credit risk when they issue the loan, which typically comes with a term of less than 30 days.
Payday loans can indeed offer people immediate relief, but they come at a high cost, and one that could be more damaging to their long-term financial stability.
How Payday Loans Can Cause Harm
In general, payday loans are considered predatory because they take advantage of desperate situations by charging a high interest rate that can trap borrowers in a cycle of debt.
Lenders are required by law to disclose the terms of the loan, including any interest rates and fees, but many borrowers either overlook those conditions or accept them in desperation. The interest on payday loans can be as high as 500%, so the cost of repaying that loan could compound quickly and consume someone’s finances.
Sometimes, borrowers can get trapped in a cycle of taking out another payday loan to fund the fees and expenses of their original loan. Obviously, that situation has several destructive effects on a person’s financial health, including preventing them from saving and increasing their expenses. If you’re trapped in a payday loan cycle, it can be very difficult, if not impossible, to pay off your debts and put your money toward long-term goals like buying a house or a new car.
Laws on payday loans vary from state to state, but oftentimes these loans avoid stricter consumer-friendly regulations because they are made in smaller amounts and by smaller lenders.
Alternatives to Payday Loans
If you are among the Americans living on a tight budget, you should be aware that you have other options besides payday loans when you need a hand.
Earned wage access, also called on demand pay, is one of the better choices for meeting your short-term financial needs, however it’s only available if your employer provides it. Early wage access works in a similar way to payday loans in that it allows you to tap a future paycheck. But unlike payday loans, earned-wage access programs don’t prey on borrowers.
There is no interest rate on advances made through earned-wage access programs, so this financial tool is one that can help boost you out of a downward spiral instead of pushing you deeper into a debt hole.
Rain’s earned-wage access program is available for medium and large U.S. companies that want to help improve the financial health of their workforce. Click here to sign up.
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