Henry asked us the following question:
“I have an average salary working as a shift operator. I’m encouraged by the fact more lenders today are willing to give loans to people with bad credit like me. However, I learned my lesson after spending a year to pay a runaway credit card debt. Are payday loans the same or worse as far as getting you in a debt spiral? How can I avoid it in case I need to take out this loan?” – Henry, San Francisco, CA
The simplest solution is to pay the loan on time. Of course, that’s easier said than done. After all if you take out a 600 dollar loan it is likely that you’re short of this amount for longer than the next paycheck. A direct lender often charges penalty fees for every payday that you miss; that’s when you’re caught in a debt spiral. But you can lessen the risk of falling into this trap if you keep in mind the following tips:
Conversely, ask yourself how much your income can pay in two weeks, which is generally the period allotted for repayment. Because if you can’t pay a 600 dollar loan on your next paycheck, you’ll be rolling it over to the following paycheck and so on. In the process, you’ll end up paying more on interest than on that six hundred bucks you owe. Even if it’s easy and fast now to get approval for a loan today, only get a small loan that you can afford.
The National Consumer Law Center debunks the myth that payday loans, which are also popular in the UK and Canada, have lower interest rates than credit or bank loans. In fact, if you calculate the annual interest of payday loans, it can reach as much as 390%! That’s why…
Even before you start thinking where to get a loan, think first how you can repay it. If you really need to take out a 600 dollar loan for an emergency, but you know your next salary is not enough to pay it back in two weeks, think of another way to source the payment. In short, have an exit strategy. Don’t get bogged down by your salary’s limitation. Maybe you can go around the neighborhood and offer lawn cleanup this fall, or babysit for another family. You can also offer freelance services online if you have skills like writing, creative services, or administrative skills. In two weeks, you can cook up a number of sidelines to earn enough cash to pay for the loan. Even if you’re retired, you can try these part-time job ideas from AARP.
Remember that loans don’t give you extra cash; what they give you is an extension of your cash flow. You still need to work hard to earn that cash, albeit belatedly.
The worst thing you can do when you’re about to default is to stay quiet and hope the problem will go away. It won’t. Your 600 dollar loan will increase exponentially every after payday. For a monthly 15% interest alone, your charges can jack up to over 300% in a year. Moreover, the default will haunt you in the future when you try to get another loan. Instead, be honest with the direct lender. Negotiate with him for an extension with minimum charges. Often, lenders are flexible in their conditions because their goal is to get their money back. Running after errant borrowers is the hardest thing for lenders; they’ll certainly be happy to help borrowers that run to them for help in repaying.
Falling into a debt spiral is often avoided by understanding how loan works. Often, an honest-to-goodness assessment of your financial situation and open communication with the lender are all that’s needed to manage debt.
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