3-month payday loans might sound like a dream to some people. I was one of them! I’ll get the money I need now, and repay it after three months. Surely, I’ll be back on my feet by then, right?
Well, that depends both on the amount I borrowed and the amount I needed to give back. Keep in mind that these two numbers are nowhere near close. That’s something I didn’t realize in time.
3-month Payday Loans vs. Other Payday Loans
All payday loans are short-term loans. What’s more, they are almost exclusively loans for small amounts ($500 to $2000).
The difference between standard payday loans and 3-month payday loans is the amount of time I have before I have to cough up the money I loaned (and a bit extra). Unlike with installment loans, the longer the grace period is with a payday loan, the harder it will be to give the money back.
Installment loans allow people to pay the money back bit by bit. They don’t cause a massive strain on the budget.
No Installment Options
In an ideal world, I’d be able to combine installment loans and payday loans. But alas, we live in the real world, where I’m expected to pay back the entire sum of money at once for a 3-month payday loan.
This didn’t sound bad to me at first. After all, I only needed a little pick-me-up — a couple of hundred bucks, right?
Sure, that’s not much. But I forgot that those couple of hundred would turn into a couple of hundred plus APR. What’s more, once the grace period was up, I had to have the entire sum ready for payment.
Thus, 3-month payday loans aren’t as manageable as one might think. Studies show that it’s easier to pay off a loan in small chunks than all at once. So, 3-month payday loans are more stressful.
I Was Able to Pay the Debt Off Early, But Nobody Cared
With many installment loans, those lucky few that are able to scrape together enough money early and pay the loan off sooner than agreed, get to save some money. It’s not much, but every dollar counts, right?
With 3-month payday loans, things are quite different. The fees and interest are usually flat. That means that it didn’t matter when I paid the loan back (unless I was late). I still had to pay the same exact amount.
The APR Is Extremely High
The APR, or the annual percentage rate, was my worst enemy when it came to 3-month payday loans. This little acronym determines the cost of fees and interest for the full year, and it’s an indicator of how significant the interest will be.
Payday loans are notorious because of their high APR. It’s usually around 200% or 300%, but it can also be much higher (400% or, if you find a particularly nasty lender, even 1000%). So, for my $1,000 loan, the APR was 300%. That means that at the end of my 3-month grace period, I had to pay $1,536.90.
And So Are the Late Fees
3-month payday loans have astronomical fees. Some lenders set fees that are so high that their clients often can’t afford both the loan and the fees. This is actually quite common, and it pushes people into “the cycle of debt.”
What happens in this cycle? Well, let me tell you, because I nearly fell into it. Let’s say I’m late with my payoff. The lender charged the standard late fees — no surprise there, right?
Of course, I barely scraped up the money to pay back the original sum I loaned plus the APR. Now I have to pay for the fees as well?
I don’t have that money! So, where did that leave me? It left me delaying the payback date, which costs money. Thus, I kept paying fees while my original debt sat there and waited. As a result, I ended up spending way more money than I originally planned.
Alternatively, some lenders will give out loans via postdated checks. If you don’t have the necessary amount in your bank account when it’s time to pay the piper, you’ll get slapped with bank fees on top of everything else.
Easy To Access and Find
When I needed a 3-month payday loan, I had no trouble getting it. What’s more, I had the money I needed in hand within 24 hours.
So, they are easily accessible. These loans are also quite easy to get, as there are very few requirements for them. You don’t need a good credit score, or anyone to vouch for you. All you need is a valid ID, an active bank account, and proof of income.
Because payday loans don’t require credit checks, they are usually the last resort for people who are already struggling financially. The marginalized members of our society, as well as those below the poverty line, are the primary victims of the vicious cycle of debt that’s perpetuated by these payday loans.
They Are Usually Predatory
Predatory loans are those unaffordable loans that misinform or mislead the borrowers. If a loan doesn’t help your credit score and if the lender doesn’t check whether you’re actually able to pay it back or not, then it’s most likely predatory.
As I mentioned, the “prey” are marginalized members of society as well as low-income communities. These loans only worsen their financial hardships (in the long run). Because of excessive APR and late fees, people end up in a cycle of debt and keep borrowing money to pay off fees. In fact, on average, one in every four payday loans will be borrowed nine times.
They Don’t Affect Credit Scores
3-month payday loans are high-interest, low-quality loans that don’t help build my credit. I know that now. They can’t help, because the lenders don’t report them to credit bureaus.
If this sounds familiar, that’s because the situation is similar with medical debt. The lender will only report the loan to the credit bureaus if you rollover the loan, and they send it to collections.
So, what does that mean? Well, not only do these loans not help my credit score, but they can also hurt it if I’m late with the payment or need an extension.
A Few Parting Words
People generally take out 3-month payday loans as a last resort, when they are in dire need of cash and don’t have the time or the resources to wait for a better opportunity. While predatory and expensive, these loans can be helpful in a pinch, although I’d only recommend them as a last resort. Otherwise, any other installment loan might be a better option.