Borrowing money from any person or company can feel incredibly risky. And, in some cases, that’s true — there are many lending operations that border on the predatory. But, are there any online lenders that protect their borrowers? And, is there any way to distinguish a good lender from a bad one so you can borrow safely?
What is a “Payday Loan”?
First, let’s understand what payday loans entail. Small personal loans up to $2,000 are generally called “payday” loans because they’re small enough to be settled with your next paycheck. If you need cash today and you don’t get paid for 12 more days? A small personal loan can help you get by until you get that paycheck — and the paycheck will take care of the loan. In theory, It’s a great way to get yourself and your family out of a tough spot.
In practice, however, many lenders have turned personal loans and “payday advance” services into a risky endeavor that quickly spirals out of control. The risks of borrowing from such a lender are so well-known that the entire payday loan concept has a very negative connotation.
The basics of personal loans are logical and can be a good option when carried out correctly and fairly. Problems only arise when the lender sets up loans that don’t protect the borrower. There are two types of lenders: lenders that do business fairly, and those that seek to make a quick buck.
Types of Lenders
In Australia, lenders can charge a maximum fee of 24% on a personal loan. On top of that, lenders can levy extra fees for things like late payments- and those fees can add up. There are some lenders — let’s call them “irresponsible lenders”— that charge the highest interest rates and levy the heaviest fees, no matter who the borrower is.
They also use very small payment windows (as short as 16 days) that place the late fee much closer on the horizon than most people realize when they take the loan.
Irresponsible lenders also neglect their responsibility to look out for the borrower, failing to perform credit and income checks that prove their ability to pay a loan back. If you are talking to a lender and the offer seems too good to be true, be wary.
Unfortunately, the personal loan offers that seem a little too sweet are often just that — sugar-coated loans that will bite you in the long run. These lenders are banking on the assumption that their borrowers cannot repay in time and will then be subject to daily late fees.
Irresponsible lending turns what should be a simple, mutually beneficial loan into a nightmare for the borrower. Chances are, you’ve heard people warn you about “payday loans” in the past. These types of irresponsible lenders are exactly what they were talking about. Fortunately, not every lender operates that way; some lenders have policies that protect both their profits and the borrower.
These lenders value doing their due diligence and treating borrowers with fairness and transparency. Of course, interest and late fees still exist, but they are much fairer and designed to prevent borrowers from taking advantage of the loan, not so that the lender can take advantage of them.
This finance firm, for example, is upfront about the way they do business. They base their fees and loan amounts around your income and credit history so that the payday loan you receive is appropriate and can be paid off without running into trouble.
Responsible lenders also give you a lot longer to repay your loan, keeping those late fees at bay. Not everyone can handle repaying a $2,000 loan, and responsible lenders won’t give you that amount if you cannot safely repay it.
If you are thinking about taking out a payday loan, it is crucial that you investigate the lender and make sure that their lending practices are responsible. If you cannot verify that a potential lender has your best interests in mind, it’s wise to stay away from them.
How To Spot the Difference
So, how do you tell the difference between a responsible and an irresponsible lender? Read their website, looking for information about fees and terms. Look at their policies and ask yourself whether they are there to protect you or trap you.
If they don’t perform credit checks and offer just about anyone the full $2,000 on a short repayment window, they probably aren’t your best option. On the other hand, if you see promises to take your credit and income into account, as well as long repayment windows, you’re seeing signs of a lender that wants to be fair with you.
Other Strategies for Borrowing Online
Open Up a New Line of Credit
Before taking out a payday loan, you might want to consider getting a new credit card. While this may not be an option for some people, taking a long time to pay off a credit card usually won’t impact your overall credit the same way taking months to repay an overdue payday loan will. If you’re concerned about your ability to repay a personal loan, a credit card might be a more reasonable choice for you.
Find a Different Loan
Some people might be able to find different loans that will help them through a tough time. For instance, if you are self-employed, small business loans generally have more favorable terms and can keep your business (and family) afloat through a period of low revenue.
While not usually thought of like a traditional loan, debt consolidation loans can make it much easier to pay the bills by lowering your interest rates and monthly payments. If you have debt from several different places, you may want to consider consolidating that debt under one new loan that makes handling debt easier.
Borrow from Yourself
If you have any retirement savings or other money hidden away, you may be able to dip into it to cover your expenses for a short amount of time. In the long term, you will suffer financially because the $2,000 you were saving for retirement will no longer be accruing interest.
You may also be taxed for that money when it would be yours tax-free at retirement. However, if your retirement plan allows you to take money out, you will have emergency funds available with no interest or late fees- ever.
Still, though, no borrowing strategy is quite as convenient as a payday — provided it’s done right. If you’re looking for a quick influx of cash, consider borrowing from a responsible lender. There are more of them out there than you think, who are willing to work with you and believe that it’s possible to make a profit without taking advantage of their borrowers.