Payday loans. Options, Mistakes, Advises.

22 August 2018 413 Views

Summary

Every year, approximately 12 million Americans take out short-term or payday loans in various ways: online sites, local companies, or other types of short-term funding. The application review process is normally quick and easy and doesn’t require collateral from the applicants. However, because these short-term loans are unsecured and don’t require collateral, they have high interest rates.

Let’s examine the correct ways to use payday loans, especially those which won’t worsen an applicant’s financial situation.

How Do I Mitigate the Risk of Debt Trap?

Mistake #1: Applicants should thoroughly assess their finances and decide how much funding is really required, especially if they are thinking of taking out a short-term or payday loan. Unfortunately, many applicants mistakenly believe that they only have to return the original amount they borrowed, completely forgetting about the interest. This is often how a debt spiral starts.

Mistake #2: The previous mistake often leads borrowers to take out another personal loan in order to cover the previous loan. Sometimes, borrowers can’t manage this spiral and they then get into even greater financial problems. This situation is called a “Debt Cycle” or a “Debt Trap.”

Mitigation Plan:

  • Pay close attention to the total payback amount, which consists of the original debt plus the interest.
  • Consider the payment schedule in relation to your income. Make sure that the schedule is realistic and then stick to it.
  • Don’t plan on taking out a second payday loan.
  • Manage your finances carefully.

How Do I Manage Finances in the Short Term?

Option #1: Check if there are other options available instead of taking out a loan. For instance, consider selling an unused item of similar value at a garage sale or online. Almost everyone has old or unused mobile phones, TV’s, computers, and other electronics. Selling something can help a person get needed money promptly and without later worries.

Option #2: Build your own emergency fund. Simply set up a scheduled monthly transfer of a certain small amount from your checking account to your savings account. This way, if something happens, you will be able to use the money from your emergency fund and you won’t have to apply for a short-term loan.

Think Deeply. How Much Do I Really Need?

Make it a rule: if you decide to take out a payday loan, request the specific amount you urgently need right now to cover your needs. And it’s important to note that different states have different laws regarding payday loans. In some places, like New York and Washington D.C., payday loans are prohibited. In others, like California and Michigan, payday loans are allowed, but they’re strictly regulated. And in other places, like Nevada or Texas, payday loans are allowed and the regulations aren’t strict. The maximum amount of a payday loan differs from state to state. Normally, it’s between $300 and $500. However, there are states where an individual can borrow up to $1,000.

In summation, please carefully read your state’s regulations. Sometimes there is a maximum limit for the interest rate that a lender can demand and sometimes there isn’t. No matter which state you live in, keep in mind: the larger the amount you borrow, the higher the interest rate will be.

What Are the Most Common Reasons to Take Out a Personal Short-term Loan?

According to statistics, 69% of the individuals who take out a payday loan do so for recurrent expenses, 16% do so to cover unexpected emergencies like urgent car repair, and 8% do so for something special.

It’s important to remember that short-term loans aren’t “free cash”; they come with obligations and consequences and it’s highly recommended that they are only used for essential and urgent situations. It’s best to use payday loans to fix such problems as:

  • Plumbing problems, electrical issues, etc. in the home;
  • Utilities, food, or water
  • Car, bike, or other transportation issues

What is the Ideal Case for a Short-term Loan?

The ideal case is an emergency issue in which the longer you wait to fix the problem, the more expensive the fix will be. Short-term loans are recommended for such cases since the borrower will save money or benefit more in the long-term from taking out a payday loan than from waiting until the next paycheck. Before you agree to a loan, make sure that the payment schedule is realistic. And if you take out a loan, it is a good idea to cut out all unnecessary expenses. After the loan is paid, you will be able to direct these savings to your emergency fund.

Pay the Loan Back in a Timely Manner

Discuss with the lender if you can receive a discount from paying the loan back early. If the lender doesn’t offer a discount or your situation doesn’t allow you to pay back the loan early, then please follow the regular schedule of payments. Prompt payback may not improve your credit score, but the short-term lender will keep records about your reliability. So if you ever need a payday loan again, the lender may offer you a discounted rate.

Don’t Miss Your Paybacks and Re-payments Too

If you occasionally miss the scheduled payment dates, please pay special attention to repayment. Otherwise, you will incur additional fees for missed or late payments. Additional fees are frustrating and certainly won’t help you solve your financial situation.

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