Payday loans, love them or hate them, are a popular type of loan, especially for those with poor credit. They're usually small, short-term loans with high interest and fees that you repay when your next paycheck comes in. People often take payday loans out for emergencies or when short on cash. However, it can be a slippery slope for some who get stuck in a cycle of debt.
But are payday loans as bad as some believe? We break down the top payday loan myths so you can better understand how payday loans work and decide whether they're right for you.
Top Payday Loan Myths
Payday Loans Are Only for People With Bad Credit
Lots of different types of people use payday loans — not just those with poor credit. However, they are still popular with people with poor credit history because they are no-credit-check loans, making it easier to get approved.
On the other hand, those with higher credit scores are more likely to choose other loan types because they have more options. Payday loans are also relatively small compared to other loan types, which is another reason why those with good credit are less likely to choose a payday loan.
Payday Loans Charge Hidden Fees
The federal Truth in Lending Act makes it illegal for lenders to not disclose all of their financial charges. However, there's no guarantee that borrowers will read about all the fees, which is why people tend to believe that hidden fees come with payday loans.
While there may not be hidden fees, the charged prices are typically high — as are the interest rates. If you fall behind on payments, which is pretty common, you could fall into a debt trap. The CFPB found that four out of five payday loans are either rolled over or renewed — and both things could damage your credit over time.
You Don't Need Proof of Income or Employment
Another misconception around payday loans is that because they're often easier to get approved for, they don't require proof of income. Payday lenders do require proof you can repay the loan simply because it's in their best interest. If they lend to people without a job, there's no guarantee that they will receive repayments.
However, payday lenders may be more lenient about how long you've had a job or what type of job you have. The only requirement is a "steady source of income" to repay the loan. However, there's not an extensive check into your current expenses or whether you can comfortably afford the loan, which is where people struggle to repay.
Alternatives to Payday Loans
- Installation loans: Installment loans differ from payday loans in a few ways. They are repaid over a longer period with set monthly payments, offering stability and flexibility. They also tend to have lower interest rates and fees than payday loans.
- Overdrafts: An overdraft is a loan that lets you borrow from your bank when you don't have enough money in your account. They come in two forms — arranged or unarranged overdrafts. Banks usually charge a higher fee for an unarranged overdraft.
- Pawn shop loans: This is a no-credit-check loan option where you take an item of value to a pawnshop and receive money in exchange for holding your item as collateral. You then agree on a date, fees, and interest rates before paying off the loan and getting your item back. Keep in mind that your item will be sold if you don't make repayments.
Consider All Your Options for Finance
Payday loans have pros and cons, so it's essential to consider and consider all the options carefully. If you have poor credit, you may want to avoid the high fees and interest rates of payday loans and opt for another bad credit loan type. Likewise, people with higher credit might opt for an installment loan over a payday loan since it offers a higher limit.
If you're looking for a payday loan alternative without the risks, consider an installment loan for bad credit, such as those offered by Jora.
While installment loans sometimes require higher credit scores than payday loans, Jora's loans are designed to help those with poor credit access the finance they need.
Learn more about Jora Credit's installment loans or apply directly today.
What is True About Payday Loans?
Payday loans often come with high interest rates and short repayment terms, which can lead to a cycle of debt for some borrowers. However, they can provide a quick financial solution in emergencies where immediate funds are necessary. It's important for consumers to consider alternatives that offer more sustainable financial support, such as installment loans, which can provide longer-term solutions and more manageable repayment plans.