Americans owe $11.36 trillion in debt with an average of $15,270 in credit card debt alone. When it comes time to pay credit card bills, utilities, and rent/mortgage, some consumers might be tempted to look for short-term solutions to get creditors off their backs. Enter: payday loans.
Payday loans have grown increasingly popular in the last few years because they’re an easy way to get cash in your bank account when you might need it most (oftentimes to your detriment). According to AARP, there are more than 20,000 payday lender stores in the U.S. Nearly 19 million U.S. households use payday lending services each year.
These days, consumers who need quick cash don’t even have to leave their homes to get payday loans. Interested borrowers can find payday lenders online. Major banks like Wells Fargo and U.S. Bank even offers payday-style loans, though they are winding their programs down in response to new legislation from regulators that make it less profitable to offer these products.
But before you head off to your nearest payday lender, there are a few things you should be aware of so that you don’t end up deeper in debt. The Consumer Financial Protection Bureau says Americans spend more than $7 billion on fees alone for payday loans. And many predatory lenders just want to trap you into paying more money for borrowing. To help you avoid the trap of digging yourself deeper into debt, follow these tips if you’re considering getting a loan from a payday lender:
1. Look at the rates and know how much you’ll end up paying
The interest rate you’ll pay for your loan matters a lot. Some payday loan companies charge more affordable and flat rates like 15 percent. Others charge way more, even as much as 500 percent. Don’t even consider getting a payday loan if you’re going to have a difficult time paying off the interest. Have a calculator with you so that you can see exactly how much you’ll be paying to borrow the money you want. Also, avoid any payday lender that is subtle about their rates. You should know exactly how much the rate amount is before you commit to a loan agreement.
2. Pay attention to how you’re paying for the loan
Be very wary of taking out loans that must be paid from your checking or savings account or with a prepaid debit card. You don’t want your assets to be garnished should something go awry with your loan. And oftentimes payday lenders take payments from your bank without notifying you first. You don’t want to end up in financial distress taking out a loan, so pay attention to the terms of the loan before signing up.
3. Avoid complicated or ‘too good to be true’ loans
If the loan sounds too good to be true — it probably is. Remember that payday lending is a business and all that matters to the lender is making a profit. The lender isn’t there to improve your credit score or magically help you improve your financial situation. All they care about is the bottom line. So exercise caution and be skeptical of loans that have burdensome fees or terms you don’t understand. Chances are the complicated terms are meant to confuse you.
4. Pay attention to the fine print
Make sure you are aware of every single thing in your loan agreement. That means reading through it multiple times — and reading all of the fine print. Also, research. Check online reviews to see what others have to say about your payday lender.
5. Don’t make it a habit
A payday loan is only supposed to be a short-term answer to your financial situation. You do not want to get into the habit of borrowing money, not paying off all the interest, and letting it roll over into the next pay period, where you’ll just be paying off the interest without paying back what you actually borrowed.
6. Consider other lenders
Have you already thought about borrowing money from your bank or a credit union? Could family members help? What about a social services organization? Make sure you have exhausted all your other options before you consider a payday lender.