Cash advance loans are often touted as quick cash that can be used to pay unexpected bills. Although there are some ways to deal with a bad credit cash advance, the large expense of a payday advance loan can make your situation worse. If you’re like many short-term debtors, dealing with a constant cash shortage and struggling to keep up with multiple bills, here are some of the reasons why you should be wary of cash advance loans.
They Come With Finance Charges
Cash advance loans include calculation fees that can equate to an APR of 300% to 500%, but these can be much higher. You may not realize that the interest rate is this high once you opt for a payday loan, as loan costs are usually marketed as a single dollar amount. But consider this: Borrowing, say, $500 with a $75 interest and finance fee and a 14-day term would be the equivalent of taking out a loan at an APR of 391%.
Compare that to the average federal APR on a traditional long-term personal loan of 9.34%, and you’ll have an idea of how expensive it is to take out a payday loan.
High Fees Can Trap You in Debt
In addition to these high fees, if you can’t repay the loan on time, the lender may give you a new loan with a new fee. Many borrowers end up “rolling over” or refinancing the debt. The standard payday or cash-out loan borrower closed a loan nine times in 12 months and paid a total of $458 in fees, according to a report from the Consumer Financial Protection Bureau.
No Credit Check, No Credit-Building
Reputable lenders often check your credit score and your ability to repay a loan until you’re granted financing. But payday lenders don’t typically conduct a credit investigation during the approval process. And while this can be attractive, understand that a payday loan won’t always help you improve your credit score because lenders typically don’t report your payments to the three major credit reporting agencies.
You May End Up Overdrawn
According to a study by Pew Charitable Trusts, more than a quarter of payday loan borrowers said that payday lenders have overdrawn from their checking accounts. Overdrafts can result in penalties for the lender and the borrower, which is a major contributor to the debt crisis. Since payday lenders usually target those with minimal incomes, several laws were designed to protect certain groups from these exploiting tactics. For instance, military consumers are protected under a federal law that limits annual percentage rates on payday loans to no more than 36%.
