Payday loans are infamous. Everyone knows about them, but there are still a lot of misconceptions about them. They are commonly seen as a bad choice for your savings and for your credit report. But, with new technologies, a great variety of lenders, and the ability to take out short-term loans quickly, the common misconceptions of today could not be further than the truth.
Payday loans are now a type of short-term loan. You can take them out on a very short basis, where you pay them back just after you get paid, or you can spread out the payment between two to 12 months. In fact, the new short-term loan alternative to the old-school payday loan is often the far better option, as you can pay off your debt without pinching pennies or scraping through to the next month, thus giving you a much more stable opportunity to rebuild your safety net and move forward.
1. Payday loans will only rip you off
While it is true that some payday loans have high interest rates, the ability to take out short-term loans, compare payday loans online, and choose the best lender and best lending deal have meant that you can get the loan you need at very appealing rates.
You will, of course, be paying back more than you take out, but that is true with every loan. There is a reason why creditors have the incentive to loan out the money in the first place, and that is with interest rates. When you have a good score, you can get the money you need for very little interest rates, especially if you have the option to repay it all early.
2. Payday loans are only beneficial to the lender
Payday loans are definitely of interest to the lender, but that doesn’t mean they are not beneficial to the borrower. They are there specifically when you cannot pay off your unexpected cost through other means. This could be because you need several paychecks to cover the costor because you have reached the credit limit on your credit card.
By taking out a short-term loan, either to pay it back on your payday or slowly through several months, you can better manage your finances and absorb the high cost of your unexpected bill or repair.
3. Payday loans always have hidden fees and conditions
It is legally impossible for payday loans to have hidden fees or conditions or for those conditions to change after you have signed the agreement. It is crucial, however, that you carefully read through the terms and conditions of your loan before you agree and sign anything. The loan industry is highly regulated, working to protect consumers from unscrupulous, or even illegal activities from lenders. It is up to you from there to ensure you read and understand the agreement you sign.
4. Payday loans are only for people with serious financial issues
You don’t need to be between a rock and a hard place to take out a payday loan. In fact, it can be very responsible to take out such a short-term loan. The rest of your expenses don’t just disappear when you have a big, unexpected cost or repair to handle. Just because you can cover the cost of that repair or replacement with your next paycheck does not mean you can actually afford it when you factor in your other living costs.
The best way to easily handle this new cost is to spread out the repayments with a short-term loan, so you can confidently continue to make your repayments without feeling the squeeze or going through drastic measures.
5. Payday lenders use threats or force when collecting dues
Payday lenders are highly regulated and use the same methods to collect missed, late, or missing payments that banks do. These are fair and lawful methods used to encourage repayments. In extreme situations, however, your loan may be sold off to a debt collector, who will again adhere to legal rules and regulations when it comes to collecting the money that you owe.
If you do feel like you are being coerced, or have been threatened, then it is imperative that you follow this The Balance Small Business guide to report the lender and their behavior to the Better Business Bureau. If their behavior does go beyond the legal framework available to them, then you have legal protections available to you.
6. You are better off not taking the payday loan
In this misconception, the assumption is that you can ignore the cost or the invoice until your paycheck. While this may sometimes be an option, know that you can only do this with a written agreement from the company or person you owe money to. If you get permission to pay the invoice by a certain date, then you can avoid the payday loan. For example, if you are working with a small mom-and-pop mechanic to get your vehicle fixed, and work out a deal to pay your invoice the day of your payday in exchange of them keeping your vehicle as collateral, then you can avoid the payday loan. Alternatively, it could be better to take a loan from a friend or family member if they have the cash and are happy to help you.
Most, however, will not have this option, particularly if you need a replacement or are paying off some sort of fine. In these instances, you will always be better off taking a payday loan, or better yet, a short-term loan, to pay off your initial bill and then spread out the costs further in a way that is comfortable to your budget.
7. Taking payday loans will hurt my credit score
It’s easy to see how this myth began. After all, typically, you only take out a payday loan when you don’t have the funds on hand until your next payday. This can be seen as poor money management by lenders, and therefore taking out that payday loan can actually hurt your credit score, right? False. In fact, letting payments or invoices go unpaid can hurt your credit score, so don’t miss paying back any loan you take out.