Life is like the Dutch weather, unpredictable. Expenses we are unprepared for may be incurred by us. No cash in hand and at the bank, No parents or friends to borrow money from, or if there is, the money borrowed isn’t enough. The only option that might cross your mind at that moment is a Payday loan.
Undoubtedly, they can be an easy means for paying unexpected expenses but they can also have their disadvantages. Hence, it’s a bit difficult to give a quick and direct answer to the question “Are Payday loans bad?”.
Considering the risky side of this kind of loan, it’s better to get them only when there’s an emergency and there’s no other way to turn.
In the following, you’ll find more information about the disadvantages of payday loans and other better alternatives to this kind of loan.
What is a Payday Loan?
A Payday loan is a form of short-term loan designed in a way that it’s to be repaid with the interest in a few weeks or when the borrower gets their next paycheck.
They are used for taking care of sudden expenses, that’s because they’re very easy to get since you can complete the whole application process in a few minutes either in their shops or online.
In addition, during the lending process, your bank account and income will be examined by the Payday lenders. Your earnings are verified to determine your ability to repay the loan and your bank account verification has a different purpose.
Payday loans are generally a last resort. They’re borrowed by those who don’t have any other option.
Is getting Payday Loans bad?
Let’s consider some risks associated with payday loans:
1. Excessive interest on loans
On the surface, borrowing Payday loans might not seem dangerous. However, when you consider the loan interest, it is usually nerve-racking.
You have an emergency, you get N50,000 immediately, and you have a few weeks to repay, but the interest rate is N32,500 which is outrageous for an average person taking out a loan.
2. The very short repayment duration
Another risk of Payday loans is their effect on your finances due to the short-term loan repayment policy. Some of the loans offer a period of up to three months of repayment, but others may require repayment in full from your next paycheck.
The time limit can be hard on borrowers, as planning other monthly expenses with the loan repayment could be complicated.
3. Continuous Payment Authority (CPA)
Another reason Payday loans might be considered a bad choice is that some Payday lenders ask borrowers for Continuous Payment Authority (CPA) before the approval of the loan.
This CPA means that the lender has access to withdraw money from your bank account up to the amount he chooses on the condition that there are sufficient funds in your account.
What are the Alternatives to Payday Loans?
Before applying for that Payday Loan, Consider the following alternatives:
By setting up a budget, you’ll be able to keep track of your cash inflow and outflow. When you know how much you’re earning and how much you’re spending, it helps you to manage your finances prudently.
You can start by creating a draft of your daily spending, and by doing this, you’ll be able to know the expenses you can avoid.
You may also like: The process of budgeting; Planning to achieve more
2. Increase your earnings
Another great alternative to payday loans is finding ways to increase your income. You can increase your earnings by asking for a raise in your salary as much as it is appropriate or perhaps look for a side hustle to increase your income.
For example, Cab-hailing services like Uber, Having digital skills, and more.
3. Co-operative societies and Small loan companies
“Saving for the rainy day”, that’s the slogan of most cooperative societies. They’re known for lending their members money in a time of dire need, and the loan application process isn’t cumbersome. Therefore you should join one to make loaning easier.
In addition, Small loan companies are also a great avenue to look for small loans, especially if you own a business. They may be ready to lend you money at competitive rates, you can try them instead of a Payday loan.
4. Get a sinking fund
A sinking fund is a bit similar to a contingency fund, but while contingency funds are set aside for any emergency, sinking funds are set aside for a specific upcoming expense.
For example, if you know you’re having a big financial expense in the future, you can start saving a small part of your earnings each month, until the needed money accumulates. That way, you won’t have to spend a dime from your income for the expenses.
5. Get a short-term loan from friends and family
Borrowing from Friends and family is also an alternative to a Payday loan. Though they might not have the required amount you need, it’s still better to borrow from them than from where you’ll be in an endless cycle of debt due to the outrageous interest.
You can put the loan agreement in writing to prevent disagreement during repayment.
An additional option is to get a Salary advance loan from your employer.
How can I prevent needing a Payday Loan from the onset?
If you’re on the brink of getting a Payday loan, give yourself a little pause and reflect on what the expenses are. Are these expenses what you can avoid? or the one you can settle when you collect your next paycheck?
If the answer to these two questions is yes, it’s advisable not to get the Payday loan but if it’s a no, then the expense is a necessity, for example, for a medical or house emergency, you can consider the payday loan.
However, as the slogan of the co-operative societies, “Saving for the rainy day”, you can avoid considering a payday loan or any loan from the onset by creating a Contingency fund.
Like the Government created a contingency fund to be helpful in times of emergency, you can also overcome the lack of savings by creating a contingency fund account that can be helpful to you in times of emergencies.
When the time is hard, considering a Payday loan is understandable. However, it is like a shackle on your neck due to its unfair interest rate. It can affect you not only financially but emotionally too. So it’s better to avoid it as much as you can.