Introduction
Payday loans are associated with a set of myths that may mislead borrowers and lead them to make wrong decisions. As these loans provide quick solutions to the immediate cash requirements, they have been described as controversial due to their high interest rates and short repayment tenures. Unfortunately, some borrowers end up being inclined towards the myths associated with payday loans and end up in a lot of problems. Let’s discuss these myths and clarify the concept of payday loans in this article.
Myth 1: Payday loans are not very expensive as some people may think.
Reality:
Payday loans are by no means cheap. They are characterized by a very short repayment period and have very high interest rates of between 300% and 600% of the initial borrowed amount. Borrowers may believe that since the amount borrowed is small the interest that they will be charged will not be very expensive, but even a small payday loan can have a lot of fees and charges if the borrower fails to pay the loan on time.
Payday loans should be considered as the last resort rather than a cheap credit product. Borrowers should compare other options like personal loans or credit union loans because such loans have very low interest rates.
Myth 2: Payday loans do not affect your credit score
Reality:
Payday loans do not work in the same manner as normal loans in terms of reporting back to the credit rating bureau, but this does not make them harmless. Unfortunately, most payday lenders do not report loan activity to the three major credit bureaus: Experian, Equifax, and TransUnion, so paying off your loan on time does not improve your credit score. However, if you fail to make the payments on the loan and the loan is turned over to a collection agency, that information will be reported to the credit bureaus and it will be detrimental to your credit for years.
For consumers who want to rebuild credit, they should consider personal loans, which are reported to credit bureaus, or a secured credit card instead of payday loans.
Myth 3: Payday Loans Are Only for People With Bad Credit
Reality:
While payday loans are often marketed to individuals with poor credit, they are not exclusively for this group. Payday lenders do not perform credit checks in the traditional sense, which makes their loans accessible to a wide range of borrowers, including those with good credit.
That said, just because payday loans are accessible doesn’t mean they’re the best option. Borrowers with good credit have access to more affordable options, such as personal loans from banks or credit unions, which offer lower interest rates and better terms.
Myth 4: Payday Loans Are the Only Option for Emergency Cash
Reality:
Many borrowers mistakenly believe that payday loans are their only choice when they need emergency funds. In reality, there are many alternatives to payday loans that offer better terms and lower fees. Some of these options include:
Personal loans:
Available from banks, credit unions, and online lenders, these loans offer more favorable terms and lower interest rates compared to payday loans.
Credit union loans:
Many credit unions offer small-dollar loans specifically designed to help members avoid high-cost payday loans.
Borrowing from family or friends:
This can be a more affordable and flexible option for those who are in a bind.
Employer advances:
Some employers offer paycheck advances to help employees cover emergency expenses without incurring high fees.
Exploring these alternatives can help borrowers avoid the high costs and risks associated with payday loans.
Myth 5: Payday Loans Are Easy to Repay
Reality:
Payday loans may seem easy to repay, but the short repayment period—typically within two weeks—can make it difficult for borrowers to pay off the full amount. Many borrowers find themselves unable to repay the loan on time, leading to additional fees, loan rollovers, or the need to take out another payday loan to cover the initial debt. This creates a cycle of borrowing that can be hard to escape.
Borrowers should carefully consider whether they’ll be able to repay the loan on time before taking out a payday loan. If not, a longer-term loan with more manageable repayment terms may be a better option.
Myth 6: Payday Loan Lenders Are All Predatory
Reality:
While there are certainly payday lenders that engage in predatory practices, not all lenders operate this way. Many payday lenders are regulated by state and federal laws that limit interest rates, fees, and loan terms. However, it’s important for borrowers to research lenders and understand their loan terms before agreeing to anything.
That said, even with regulations in place, payday loans are often not the best choice for consumers due to their high costs and potential for debt cycles. Borrowers should prioritize lenders that offer transparent terms and affordable repayment options.
Myth 7: Borrowing a Payday Loan and then rolling it over is the best financial decision one can make.
Reality:
It may sound like a good idea to roll over a payday loan in order to give the borrower more time to repay the money, but this only digs the borrower deeper into the hole. Every time you renew a payday loan, new fees and interest rates are charged on the initial amount borrowed making the total cost of the loan higher. This can make it even more difficult to repay the loan, therefore putting borrowers in a cycle of debt.
To avoid rolling over a payday loan, the borrower should consider the following options; negotiating with the lender to have an extended time to pay, taking a loan from friends or family, or seeking help from a credit counseling agency.
Myth 8: Payday loans are still regulated in the same way across the country.
Reality:
Payday loan laws differ from state to state, so some consumers are likely to be charged much more or receive less protection than others. Payday loans are legal in some states, and in others they are highly restricted or even prohibited, while the lenders are allowed to set very high fees and interest rates.
Consumers should know the payday loan laws in their state before they apply for a loan in order to avoid being duped. In some states, the lending laws are more stringent, and therefore the conventional loans are expensive and difficult to obtain.
Bottom Line
There is a lot of confusion about payday loans, and the myths that surround them are likely to get borrowers into trouble. These loans may appear very helpful especially when one is in dire need of some cash but they are associated with very many risks that overshadow the benefits. By demystifying these myths and knowing the truth about payday loans, the borrower is in a better position to avoid such loans and look for better and cheaper options. That is why at Larvin Advance Loans, our focus is on customer education to be able to make the right financial decisions for their future.