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What Are Payday Loans and Why Are They Dangerous?


Payday loans are popular financing options when people need a small amount of money until their next payday. They are quick and easy to obtain, and credit checks are usually not required.

But, are payday loans a good idea?

Although payday loans are convenient, there are some important things about them that you should know.

What Are Payday Loans?

A payday loan is a type of loan that is offered by some private lenders. They are usually for small amounts of between $50 and $1,000, and there are usually no restrictions on what you can use the money for.

The way a payday loan works is simple. When you are loaned the money, you promise to repay it the next time you are paid, which is usually two weeks.

Qualifying for a payday loan is very easy. You will need:

  • Valid ID
  • Be at least 18 years old
  • Proof of employment or income
  • A checking account with a bank or credit union

When you apply for a payday loan, you will be required to give the lender a post-dated personal check. You may also be required to sign a document that allows the lender to automatically withdraw the amount you borrowed with interest from your checking account when it is due.

Payday loans have several benefits, which is why they are so popular. First, you usually receive the money the same day you apply. There is usually no waiting unless you choose to have the money deposited into your checking account.

Another benefit of payday loans is that no collateral is required. Your credit score also doesn’t matter since payday lenders usually don’t do credit checks. Because of this, these loans are popular with those who have poor credit scores.

Why Are Payday Loans Dangerous?

Although payday loans are quick and convenient, there are some important negatives about them to consider.

One of the reasons why payday loans have drawn the scrutiny of government regulators, the media, and even many customers is because of their high interest rates. According to Business Insider, payday loans can have interest rates of over 600%. While such rates can be lucrative for the lenders, they can be devastating for borrowers who live paycheck to paycheck and struggle to make ends meet.

Another reason why these loans can be dangerous is in how payday lenders collect their debts. If a borrower is unable to repay the debt when it is due, the lender will either process the blank check for the full amount of the borrowed money plus interest or withdraw the funds electronically from his checking account. If the borrower doesn’t have enough money in his checking account, it could result in an expensive overdraft fee, making a bad financial situation even worse.

Payday loans also have a reputation for trapping some people in cycles of debt that they may have trouble escaping from. A payday loan can be helpful when money is tight, but the aggressive tactics that lenders use to get their money back can put people back into tight financial situations.

Finally, if something happens and you are unable to repay a payday loan by the due date, it could negatively affect your credit score. This could prevent you from qualifying for other loans, renting an apartment, landing a good job, or something else—all of which may require a credit check. 

Consider a CU Cash Now Loan Instead

If you are considering a payday loan, a much better alternative is a CU Cash Now loan from OUCU Financial. These loans allow you to borrow a small amount of money for whatever needs you may have.

With a CU Cash Now loan, you can borrow up to $500 with an APR of 18%*. This compares very favorably to payday loans which can have interest rates of over 600%.

Another great benefit of a CU Cash Now loan is that no collateral is required. Your credit history also doesn’t matter. These loans are available to all OUCU members for a low $50 annual service fee. Repayment options start at $20 per month.

A Personal Signature Loan Is Another Great Option

If you need to borrow more than $500, another great option to consider is a Personal Signature Loan from OUCU Financial. These loans can also be used for many different purposes. A few popular uses include:

  • Home repairs
  • New furniture
  • Vehicle repair
  • New appliances
  • Medical expenses
  • Consolidating debt

The amount you can borrow with a Personal Signature Loan starts at $1,000, and no collateral is required. As the name implies, your signature is all that is needed. These loans have an APR as low as 11.24%, and repayment terms of up to 60 months are available, depending on amount borrowed.

To qualify for a Personal Signature Loan, you must meet the following requirements:

  • Be in good standing with the credit union
  • Meet the minimum credit score requirements
  • Show proof of your repayment history on your debt
  • Provide proof of income and ability to repay your loan

Borrow Smart with a Loan from OUCU Financial

Payday loans get a bad rap for a good reason. They have extremely high interest rates, and the lender will get its money back whether you can repay it or not. Also, if you’re not careful, they can trap you in a cycle of debt that may be difficult to break free from. 

Thankfully, payday loans are not your only option if you need to borrow a small amount of money. Either a CU Cash Now Loan or a Personal Signature Loan from OUCU Financial is a much better option. Both loans have much lower interest rates and longer repayment terms than payday loans. This gives you greater flexibility with loan repayment and reduces the stress of having to come up with the money you borrowed by your next payday. 

See Our CU Cash Now Loan

*Must be an OUCU member in good standing for a minimum of 120 days. Member must be in good standing at the time the loan is applied for and each time an advance is made. Member must be employed for a 6-month period, or be receiving verifiable fixed income, must provide proof of income and time on job at the time of application. Member cannot be in the process of filing for bankruptcyMinimum term: This is a line of credit. Maximum term: 5 year renewal period. If line is not renewed the access would stop at year 5 and payments would continue until paid in full. Interest rate range: 18% APR is the rate. On a $500 loan at 18% with a minimum payment of $20 will take 32 months to pay in full, total finance charge $130.91. Late fee: If you make a payment 10 days or more after the due date, you may be charged 5% of the monthly payment amount.

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