Payday loans can be a mixed bag of pros and cons for those who take them out. They tend to come with fees that equate to extremely high interest, making them an expensive type of credit. But they’re also readily available and easy to qualify for, which means they’re often the first choice for many people who are experiencing urgent financial issues and need cash quickly.
Lenders that provide traditional payday loans may have poor reputations, generally. Some people say they’re cheats or sharks that prey on those who are experiencing financial challenges.
The truth, however, is that payday loans are just a form of short-term lending which can be incredibly useful for many people. Many individuals have benefited from these types of loans when they were faced with an emergency or just needed some cash to get them through a few weeks.
It’s also true that you don’t have to take out a traditional payday loan, which might be more difficult to pay back. There are other options for short-term loans that can help you get to your next payday.
The Truth Behind 5 Myths About Payday Loans
To better understand payday loans, dig a bit deeper into some common myths below and then check out our answers to some FAQs on the topic.
Myth: Payday Loans Are Impossible to Pay Back
One of the most common payday loan myths revolves around people being tricked into taking out a payday loan and never being able to pay it back.
Where does the myth come from? This myth comes from the fact that traditional payday loan structures work like this:
- You take out a loan secured by your next paycheck
- When you get paid, you need to pay the loan back
- Life issues can make that hard to do, because if you needed money, you may not be on stable ground only two weeks later
Traditional payday loan lenders offer a rollover loan, which you can take at an additional fee. After several rollovers, the amount you owe can seem almost impossible to pay back.
What’s the truth behind the myth? The truth is that the only way you can get a payday loan is to apply for one, so no one is tricking people into taking them out. And while traditional payday loan models may involve paying the loan back very soon, the law does require that lenders disclose all that information and ensure people understand it.
Plus, you can look for short-term bad credit loans similar to these traditional payday loans. But these loans are installment loans that you pay back over a period of months. That makes the payments much easier to make.
Myth: Lenders Work on Commission
Some people believe payday loan lenders work on commission, which means the people involved have a reason to push loans on those who shouldn’t take them.
Where does the myth come from? In the past, especially before payday loans were as regulated as they were, this might have been the case.
What’s the truth behind the myth? It’s no longer the norm and certainly not common for lenders of any type to work on a strict commission basis.
Myth: All Payday Loan Lenders Are Scammers
It’s common for people to say that payday loans are scams which are designed to “steal” from the people who take them out.
Where does the myth come from? Because payday loans don’t tend to require a credit check or good credit, the interest rate associated with them can be high. People who apply for them may compare the interest rate or fees they paid with lower interest rates for loans taken out by those with good credit. Because they paid so much more in interest, they may have thought they were scammed.
What’s the truth behind the myth? Payday lenders must disclose all fees and interest before someone signs an agreement and takes out a loan. So, borrowers are aware of what they will need to pay back, making it untrue that anyone is scamming them.
Myth: The Fees for Payday Loans Are More Than the Loan Amounts
Some people say that you end up paying back more than you borrowed if you take out a payday loan.
Where does the myth come from? This myth may be linked to the option to roll traditional payday loans into a new loan for an added fee. The fees can add up to an untenable amount if someone is not careful.
What’s the truth behind the myth? The fees or interest are generally a portion of the loan and would not add up to it. It is important to work with a responsible lender, though.
Myth: Payday Loan Lenders Target Low-Income Households
Perhaps the biggest myth online is that payday loans only target low-income residents and neighborhoods. This gives rise to the belief that payday lenders are taking advantage of these individuals and families.
Where does the myth come from? Its prevalence may be due to the fact that people tend to turn to payday loans when they don’t have any cash on hand. This can lead to the assumption that the individuals who are doing this don’t have a high income.
What’s the truth behind the myth? In reality, even people who make above a low income may run into situations where they’re living check to check or have an immediate need for cash. A payday loan is available to anyone, regardless of their income stature or location. A lender will not specifically target one over another.
So, Can You Get a Payday Loan From a Responsible Lender?
Yes, you can work with a responsible lender to meet cash flow needs with a short-term personal loan. You don’t need good credit to qualify, and if you’re eligible for a loan you can even get instant funding in many cases.
Some Other Common Questions About Payday Loans
Why are payday loans not recommended?
Traditional payday loans that require you to pay back the full amount out of your next paycheck are not recommended because they may be difficult to pay back. If you don’t have enough money this paycheck, it’s not always the case that you’ll have enough money next paycheck to meet your living needs and pay back a loan.
Why are payday loans considered a trap?
Some people consider payday loans a trap because people realize they can’t pay the loan off with the next paycheck. Instead, they roll the loan over. This can create a cycle where they repeatedly roll the loan over, ending up with more expensive fees.
Do payday loans impact your credit?
Yes, payday loans can impact your credit. This is especially true if you don’t pay them back. The lender is likely to report the missed payment to the credit bureaus, and late payments can drive your credit score down.
Why do payday loans exist?
Payday and other short-term loans exist to help people meet immediate cash needs. For example, someone might take out this type of loan to pay for a medical need, cover the cost of a car repair or ensure a refrigerator is working.
