- Applying for a payday loan offers a quick and easy way to get cash in a hurry. However, these loans make it easy to get caught into a cycle of debt.
- The Consumer Financial Protection Board doesn’t require payday lenders to determine if you can afford a payday loan.
- Questions to consider include: Do you earn enough money to repay a payday loan? Do you have other lending options? How much will the payday loan cost you?
It’s easier than ever to get approved for a payday loan. Recently, the Consumer Financial Protection Board (CFPB) made a key change to payday loan regulations.
When you apply for a loan, payday lenders don’t have to verify if you can afford it. This is good news for many borrowers. After all, why does it have to be so hard to borrow money when you need it?
However, there are consequences for getting payday loans that you can’t repay. These include poor credit scores, civil suits and creditor harassment.
What to Consider Before Applying for a Payday Loan
Nothing is more stressful than being short on cash. This is especially true when you need a car repair or you can’t pay your rent.
Getting a payday loan seems like a good idea. It can provide immediate relief from financial stress. You won’t face the embarrassment of borrowing money from friends and family members.
Before you sign for a payday loan, take some time to think about how it will impact your future. Here are 10 questions to consider before applying for a payday loan.
1. How did you get into financial trouble?
Some money problems are caused by unexpected emergencies. Others are caused by poor decisions. Be sure to answer this question honestly. It can keep you from repeating the same actions that caused your financial troubles.
2. Can you afford to repay the loan in 2 to 4 weeks?
Payday loans aren’t intended to provide long-term financial solutions. Review your upcoming expenses and income. Determine if you earn enough money to pay your expenses and your payday loan installments.
3. Are you living paycheck to paycheck?
A recent report by CareerBuilder revealed that 80% of people live paycheck to paycheck. This means they don’t have money left from their paychecks to save after they pay expenses. If you live paycheck to paycheck, it’s likely that you can’t afford a payday loan.
4. Can you borrow money from another source?
Payday loans are expensive. It isn’t uncommon for annual interest rates to top 400%. Make a list of payday loan alternatives. Borrow money from a friend or family member. Apply for a personal loan from a bank. Sell items in your home that you don’t need. Consider other lending options before applying for a payday loan.
5. Are you willing to work extra hours (or start a side hustle) to repay the loan?
Repaying a loan on time will require you to make short-term sacrifices. This may mean taking on different jobs to earn extra money.
6. Do you have a plan to repay the money?
Many borrowers take out loans before they figure out how they are going to pay them back. This type of thinking can get you into a lot of trouble. Take some time to develop a repayment plan that fits your budget. Applying for a payday loan is the easy part. Paying for it can be challenging.
7. What are the terms of the payday loan?
Read the loan agreement carefully before you sign it. You should understand your interest rate, payment due dates and fees.
8. How will the loan affect your credit?
Most payday lenders don’t report information to Experian, TransUnion or Equifax unless you default on the loan. Be sure to ask the lender if the loan will have an impact on your credit report and FICO scores.
9. Can you cover the payments if you lose your job?
Currently, the unemployment rate in the United States is above 10%. Many people have discovered that their jobs are only as secure as the economy. It’s a good idea to reconsider the loan if you can’t repay it if you lose your job.
10. What changes will you have to make to repay the loan?
Take another look at your budget. Are there any expenses that you can eliminate until you get your finances back on track? Here are some things to consider. Get rid of cable. Cut your subscription services. Take your lunch to work. Cook your meals at home. Resist the urge to shop online.
Payday loans are available from hundreds of online lenders. But this doesn’t mean you shouldn’t be careful with them. Now more than ever, it’s important to evaluate your loan options carefully before sign a loan contract for a payday loan.
Want more information about what you should think about before applying for payday loans? Check out the following resources.
- The True Cost of Payday Loans and Some Borrowing Alternatives (Forbes Magazine)
- Payday Lending Laws for Each State 2020 (NCSL)
- New Payday Lending Rules (CNBC)
Are you trapped in a cycle of payday loan debt? Prepare My Chapter 7 may be able to help if you’re thinking about filing Ch. 7 bankruptcy without a lawyer. We are a debt relief agency (not a law firm) that prepares bankruptcy forms for our customers. Contact us to see if we can help you.