Pro 4: It’s an unsecured loan
Unlike a car title loan, traditional auto loan or mortgage, payday loans are not secured by personal property. This means that if you default (don’t pay), the lender can’t seize your property as a consequence.
While not secured, payday lenders often have access to your bank account as a condition of the loan, which is a different type of risk. They can also take other measures, such as sending your debt to collections or taking you to court over outstanding balances.
The cons of payday loans
When it comes to payday payday loan companies in Shoshoni loans, the Federal Trade Commission, a government regulatory body focused on preventing fraudulent, deceptive and unfair business practices, states:
The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to next payday.
Con 1: They’re expensive
Depending on the state, payday loans have high interest rates that average about 400%. For comparison, many personal loans charge about 4%-36% interest, while credit card interest ranges from about 12-30%.
To break this down into a more concrete example, here’s what a payday loan of $500 could cost you in a few different cities across the US as of :
In contrast, if you had a $500 loan with a 30% APR, you would only pay an extra $ in interest for a three-month term, making the total cost of the loan $.
Following this example, you could save anywhere from $30-$77+ for every $500 you borrow if you use a traditional loan instead.
However, many traditional lenders require a minimum credit score to qualify. And the better your credit, the more money you could save over time.
Payday loans are sometimes harder to pay back than a traditional loan, because the lender did not verify your ability to repay before lending you money. Payday lenders don’t generally assess your debt-to-income ratio or take your other debts into account before giving you a loan either.
A predatory loan is defined as having unfair, misleading or unaffordable terms and has the potential to trap users in a cycle of debt. Payday loans are viewed as a type of predatory loan because of the high costs that can escalate quickly.
- The lender doesn’t check whether you’ll be able to repay the loan. If you can’t repay the loan, you could be forced to roll the loan over repeatedly, accumulating new fees each time.
- The loan doesn’t help you build credit. If the loan provider doesn’t report to any of the three major credit bureaus (Experian, Equifax or TransUnion), this could be a warning sign. If you’re unsure whether or not a loan reports to the credit bureaus, ask.
Con 3: It’s easy to get trapped in a debt cycle
Each time you extend (rollover) a loan, a payday lender charges additional fees, increasing your out-of-pocket costs for borrowing the money.
Rolling the loan over can significantly increase the amount of time it takes to repay the loan, sometimes adding months or years to the original two week terms.
Con 4: They target low-income, minority communities
According to a 2016 report by the Center for Responsible Lending, payday lenders are mostly located in minority communities. In fact, the report found, there are about 8.1 payday loan stores per 100,000 people in African American and Latino communities, while mostly white neighborhoods only had about 4 for every 100,000 people.