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Payday loans have extremely high interest rates — but is it ever OK to take one out? Find out the answer here.
Payday loans are short-term loans with very high interest rates. In fact, the Consumer Financial Protection Bureau (CFPB) warns payday loans usually charge an APR of around 400%. Unfortunately, because the costs of payday loans are typically represented as fees you pay to borrow, many people don’t realize how high the effective interest rate is.
When you’re borrowing money at such a high cost, it can be almost impossible to pay back what you owe and stay out of debt. If you take a $100 loan with a $30 fee and you have to pay back $130 next payday, you may have a hard time coming up with the cash. And if you do pay it back, you may run out of money again before you get your next paycheck, necessitating that you take another payday loan.
Because of the huge expense and short repayment timeline of payday loans, many people end up having to take out another payday loan to repay their initial loan on time. This can keep happening over and over, until you become trapped in a cycle where you almost constantly have at least one payday loan.
Obviously, all of this means taking out a payday loan is very bad for your finances. In fact, the decision to take out a payday loan can have financial consequences that reverberate throughout your life for months and that even put you on the path to bankruptcy if you can’t break the borrowing cycle.
With that said, you may be wondering if there are ever any circumstances where it’s OK to take out a payday loan. This guide will help you decide.
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Explore all of your other alternatives before you take out a payday loan
Before you even consider a payday loan, you need to explore every other alternative first, as almost all other types of borrowing will likely end up costing you less than a payday loan. Some of the other kinds of financing you should consider include:
- Payday alternative loans: These are short-term loans available to credit union members who need speedy access to small amounts of cash. Fees are capped and you’re limited in how many payday alternative loans you can take out per year. These loans are much more affordable and are a way better way to borrow than payday loans if you have a short-term financial need.
- Credit cards: If you can use a credit card to pay for your essential purchases instead of a payday loan, you’re better off. In most cases, this is true even if you end up having to take a cash advance from your credit card — although cash advances come with higher fees and a higher APR than standard purchases on most cards. It’s true credit card interest is very expensive, but the interest you’ll pay on a card isn’t even close to what you’d have to pay on most payday loans.