Online loans are very common today. The internet has changed so many things when it comes to how we handle our finances and online loans is just of the changes that it has brought about. It has a special impact on loans because it makes the application process so much easier and convenient. It takes away the necessity of having to apply for the loan in person which can be bothersome.
Almost all types of loans have been changed because of the internet, but the one that has changed the most right now is the payday loan. Millions of people are using this method of borrowing every year and the number is bound to increase in the years to come.
Understanding Online Payday Loans
So what’s the deal with online payday loans?
These are short term loans that are given out to borrowers who are supposed to pay back the full amount when they get their paycheck. In other words it is a loan against the paycheck of the borrowers. There is a flat fee charged for the loan and that is supposed to be paid back together with the whole loan. When the borrower, for some reason is unable to pay back the full loan, then the loan can be “rolled over,” which means that there will be an extension to the term of the payday loan. An extension would also mean additional fees to be incurred by the borrower.
Risks Involved in Payday Loans
You have probably seen all the ads over the internet and the articles claiming that payday loans can be the answer that you need for your short term cash needs. At the same time , you might have also seen all the articles and warnings that are given out by government agencies claiming that payday loans are more than a bit risky.
In fact, government agencies dealing with personal financial matters say that payday loans can cause financial ruin for the borrowers that are supposed to benefit from the loans. The problem lies with how lenders are pushing this form of lending and how borrowers are using it.
The general idea of payday loans is actually sound. It can be a means for a borrower to get by until the next payday. The borrower is just getting his/her money in advance and should be able to pay back the amount once the paycheck comes in. The problem is that although the amount that can be borrowed is limited in payday loans, it is still unaffordable to the common users of the loan. Studies suggest that those who commonly use online loans are those who have low wage earners or those with limited income. In other words, people who commonly resort to payday loans are those who have little money to spare.
When someone with limited income takes out a loan that has to be paid within a week or two, there is a good chance that he/she would be unable to pay back the loan. Sometimes the borrower is forced to resort to taking out another loan in order to cover for expenses or the older loan. That can be the start of a debt cycle. The only to get out of that cycle is to get enough money to pay everything off and unfortunately for most people, that’s not going to happen.
Interests and Qualifications
The problem that we have cited with payday loans is made worse by the fact that it is by far the most expensive financial product that you can get. It might not seem like that because the amount to be paid is usually expressed in flat fees. For example, when you borrow $100 you will be charged $15 and it has to be paid back within two weeks. That’s just an example rate for payday loans. In reality, the fee could be higher. But that might sound like a fair deal to someone looking for a source of quick cash.
But in order to discover if a loan is expensive or not, you have to compare with other financial products and the best way to do that is by comparing the APR or the Annual Percentage Rate. When you get the APR for payday loans you will quickly realize that it is by far the most expensive loan that is available. It is common to get a 300% for payday loans, but there are lenders that charge higher than 500%. Some areas have placed restrictions on payday lending, but in most places it is perfectly legal for the lenders to charge APRs that are as high as that.
It is therefore no wonder that lenders could end up in debt while using this kind of loan. But a lot of people are still using it because they have no other choice. There are no other financial products that are available to them and since there are no restrictions that they can take out payday loans, they still go ahead and use it.
How to Stay Away from Payday Loans
There are many guidelines out there on how people can stay away from using payday loans, but most of those guidelines fail in emphasizing an important point. That point is that it is far better to take steps to prevent your financial situation from deteriorating than finding ways to remedy it. You should realize now that it is more useful to get your finances in order. But getting your finances in order is easier said than done. But if you are determined and disciplined enough, then there is no way that you cannot achieve that.
First thing you can try is to increase your income. Anyone can use an additional income and so you should exhaust your resources when it comes to finding ways that you can add to what you are earning. Maybe you can get a second job, or you can try some other means of generating income.
If you have tried earning more the next move that you should make is to reduce the amount that you are spending. We are always spending on something that isn’t necessary and you might be surprised by the amount that you can save when you reduce your unnecessary expenses. Start by listing all the things that you spend money on. You have to make sure that you list down everything, from the recurring expenses down to the one-time expenses. Once you have listed those things down, the next thing to do is for you to decide which are the necessary ones and the ones that you can do without. In the end you might find that what you are earning is more than enough.
The next move for you to try is to make a budget. A monthly budget can be a useful tool for keeping track of your finances. If used properly, a budget can help you spend your money wisely. You can even have some money for your pleasures and luxuries. The important thing about using a budget is having enough discipline to stick to it.
When you are using a budget and your finances are starting to be in order, you have to start setting aside some money as your savings and eventually your investment. There will always be some sort of emergency that will require that you spend money on it. You cannot foresee every expense that might come up, but when you have enough savings set aside then you can at least ensure that your finances would not be disturbed by that emergency cost.
Other Forms of Loans
There are times though that no matter how much preparation and careful planning you put into it, your finances would still be inadequate to meet a sudden cost. You should still not resort to payday loans in those cases. The first thing that you should try is to get a cash advance from your employer. That is obviously better since that is your own money and you don’t end up owing anything. But when that isn’t possible, you can try borrowing from the people that you know. Personal loans are a lot better than borrowing from lenders since there are no interests involved and you can come up with your own arrangement on when and how the amount would be paid.
Another good source of loans are credit unions. Their terms are a lot better than the ones that are offered by payday lenders. You will not have to worry about ridiculously high interest rates. Loans from traditional lenders are also cheaper, though of course the processing takes so much longer when compared with cash advance loans. But in the long run, you will benefit if you don’t fall for payday loans right away.
If you do happen to borrow from a cash advance lender, just make sure that you pay back the amount in time. You should never think that a “roll over” is a good option. Using that option can lead to your financial ruin in the long run, like what happened to so many other consumers today.