This common strategy will cost you dearly in the long run.
- It’s best not to borrow money if you can avoid it.
- If you are borrowing money right now, be sure to pay attention to the loan’s APR and repayment terms.
Paying the bills is never fun, but it’s been very painful lately with inflation driving up the cost of everything. When your finances are already stretched to the breaking point, it’s only natural to look for a way to make some extra money. But you must be careful. There is a “fix” that could make your financial situation worse over time.
Money isn’t worth massive debt later on
Borrowing money can get you the money you need quickly, but you should always know your loan repayment terms. This includes the time frame in which you will need to repay the loan and the amount of your monthly payments. The latter depends on the amount you borrow and the annual percentage rate (APR) of the loan. A higher APR means you will pay more interest.
APRs vary depending on your credit score and the type of loan. Mortgages generally have a low APR, while unsecured debt (unsecured debt that the creditor can forfeit if you fail to make your payments) generally has higher APRs. Credit cards usually have rates between 10% and 30%, but even that seems affordable next to payday loans.
These short-term loans offer the promise of quick cash and often have repayment terms that last only a few weeks. They are fairly easy to obtain for most people, which may make them attractive to those who need cash immediately. But their APRs can reach 400%.
To give you an idea of what this means for you, if you had a $500 payday loan with an APR of 400% and a repayment term of one month, you would owe $667 at the end of that month. And if you can’t repay it, you can decide to postpone the loan for an additional month to save time. Except at the end of the second month, you will owe $823. And after three months, you will owe $993. At the end of a year, your debt will be $2,500 if you are unable to repay it.
Many people find it extremely difficult to get out of this cycle once they get into it, so they just keep racking up more and more debt. This makes it even harder to pay for their living expenses, which they were already struggling with in the first place.
But that must not happen. There are other strategies you can use to get the money you need that don’t have these consequences.
Better ways to get the money you need
It’s best to look for ways to increase your income before going into debt to help pay your bills. You might consider working overtime or negotiating a raise with your employer. You can also look for a better paid job elsewhere or start a side business.
If this is not possible, you can try to reduce your expenses. It can be as simple as cutting back on unnecessary purchases or as extreme as moving somewhere more affordable.
When that’s not enough, look for more affordable ways to borrow money. Personal loans can help you get the money you need and they don’t require collateral. They have higher APRs than mortgages or auto loans, but are much more affordable than payday loans, especially for those with good credit. You can also borrow more than you can with a payday loan, and you’ll have more time to pay it back.
It is best to compare the rates of a few lenders before choosing one. Look at their refund terms and APRs to see which one gives you the best deal. Then, borrow only the amount you need and be sure to build monthly payments into your budget so you can keep them under control.
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