Hidden Traps and Costs of Payday Loans
Life can throw curveballs, and if you’re not financially prepared, you may be searching for a way to get money fast. An easy online search brings up many lenders offering quick access to cash with an easy application process. While these loans, also known as payday loans, can seem appealing now, there are often hidden costs and fees associated with them that get overlooked.
What is a Payday Loan?
Payday loans are just as the name implies, a loan you can get today and repay on payday. A typical loan amount is around $500, and depending on how and when you apply, you could walk away with the funds the same day.
The application process is straight-forward. There is no credit check or collateral requirement. To apply for a payday loan, all you need is proof of income, a valid ID, proof that you are over the age of 18, and an active savings or checking account.
How Do You Repay a Payday Loan?
When applying for a payday loan, you can either provide the lender with a post-dated check for the full amount, including fees, or sign an agreement to have the amount pulled directly out of your personal checking or savings account. The lender then uses the elected option to pay the loan on the due date, usually 2-4 weeks after you take out the loan.
What Are the Costs of a Payday Loan?
Payday loans are considered high-cost loans since typical finance charges/fees average $10-$30 for every $100 borrowed. If you are unable to repay the loan in the agreed-upon timeframe, the lender may offer you an extension, however, that will only increase the amount of fees you pay. Once the cycle of repeated extensions starts, it becomes a trap that’s incredibly hard to escape.
A hidden cost of payday loans occurs when it’s time for the loan to be repaid. When you applied for the loan, you provided the lender with repayment instructions, which involve having money available in a bank account on the due date. If funds are not available in your account at that time, you may incur a non-sufficient funds fee from your financial institution, and the lender may also charge a returned check/non-sufficient funds fee. On top of these fees, the lender may also charge a late fee since the loan wasn’t paid on time per the original agreement. After all is said and done, you could end up paying $500 for a $300 loan.
Does a Payday Loan Help Build Credit?
If you’re working on rebuilding your credit, you may have the misconception that applying for and paying a payday loan on time will help reestablish your credit. That is not the case. Because there is no credit check when you apply, and the lender does not report on-time payments to the credit bureaus, credit reporting agencies have no idea you have the loan and are making on-time payments.
Should you fail to pay back the loan, the lender can report the delinquency to a collection agency. From there the collection agency can report the nonpayment to the credit bureaus, which will have a negative impact on your credit score.
Cash Advance Apps
Although not considered a payday loan, cash advance apps are becoming increasingly popular. The Dave App is an example of a cash advance app. They market it as an interest-free short-term cash advance that doesn’t require a credit check. While true, what you don’t see are the fees that you’ll incur from the service.
Dave offers a cash advance feature that can spot you up to $500 if you need cash immediately. According to their website1, “Not all members qualify for ExtraCash and few qualify for $500.”
Every time ExtraCash is accessed, they charge a $5 or 5% overdraft fee (whichever is greater). There is also a $5 monthly membership fee to enroll in the ExtraCash cash advance feature. You must link an account to receive the cash advance and to use as a repayment method.
The due date to pay back the cash advance is either your next payday, or the following Friday. On the due date, Dave will automatically withdraw money from the linked account. If there is not enough in that account, they will keep attempting every day until the cash advance is fully repaid. They offer the option for pay back extension up to 30 days, but it must be approved by Dave. If the balance is not repaid in four months, they turn you over to debt collection.
Payday Loan Alternatives
The good news is that there are alternatives to payday loans that feature fewer fees, lower interest rates, and actual opportunities to build your credit.
- Personal Loans: If you are looking for a lump sum of funds, without the requirement for collateral, a personal loan is a great option. While it will require a credit check, a personal loan will have a much lower interest rate than a payday loan and will give you flexibility with your repayment method and terms.
- Credit Card: A credit card is another option. Unlike a personal loan or payday loan, you can keep using the card over and over as long as you have available credit.
If you make on-time payments on your personal loan or credit card, you won’t incur unwanted late fees. On-time payments are also reported to credit bureaus which will help your credit score increase over time.
Diamond offers both Personal Loans and Visa® Credit Cards to help meet your needs. If you are looking for help to rebuild your credit, Diamond also offers a Credit Builder Loan or Visa® Platinum Credit Builder credit card. “At Diamond, we encourage members to talk to us before turning to a payday lender,” said Diamond’s Member Officer II Amanda Mosqueda. “We can look at your situation and help identify options that are more affordable.” Schedule an appointment to talk to a Diamond representative today to get the right loan for your current situation.
1dave.com/about-extra-cash