There's a lot of information floating around about payday loans, some good, some bad, some true, and a whole lot of inaccuracies. Paycheck advances can be lifesavers in times when money is needed fast, but it's important to have all the facts before taking out a loan to ensure you make the right financial choices for your situation. Here's what you need should know about two common payday loan myths.
Lenders Charge Absurdly High Rates
One of the most common criticisms levied against payday loans is that companies who offer them charge extremely high interest rates. One often quoted rate is 400%, and many times critics will compare this rate to other types of loans offered by other lenders (e.g. 12% APR for credit cards).
This analysis is somewhat disingenuous, though. It's true the percentage rate charged by lenders for payday loans looks ridiculously high when viewed on a yearly basis. However, paycheck advances are short term loans designed to come due a couple of weeks from when the loan origination date. The average payday loan fee is $15 per $100 principal, which is about a 15% simple interest rate. To get to the 400% interest rate, you would have to renew the loan every two weeks for an entire year, and there are legal protections in place to prevent that from happening.
When considering taking out payday loans versus using other types of credit, compare the interest rates based on how the product is actually designed to be used rather than a highly unlikely usage scenario.
Payday Loans Trap People in Debt
Another common payday loan myth is that people who take out these loans get trapped into a cycle of debt they can't escape because they're renewing the loans every two weeks rather than paying them off completely. It's true that there are stories of people who continuously renewed their loans rather than pay them off completely when they came due, but these cases tend to be the exception and not the norm.
Most people who take out payday loans use them as they were intended, as temporary cash infusions and pay off the loans as agreed. Some people do extend the loans for additional weeks, but this typically occurs when individuals weren't prepared to pay off the debt as required. This is not unique to payday loans, however. People exhibit this behavior in all types of loan products. For instance, 1 out of 20 people with credit are at least 30 days late on their payments.
When securing a payday loan, it's important to develop a plan for paying it off before doing so. This will help you protect your credit rating and ensure the loan is available to you the next time you find yourself with a money emergency.
For more information about payday loans or to obtain fast cash for an unexpected expense, contact a lender in your area.