When faced with a financial crisis, many people who maintain a side-business end up choosing loan options that supposedly make borrowing easy when, in truth, they’re more likely to drag borrowers even deeper into debt. One of them is payday loans.
These are short-term, unsecured loans that are also known as cash advance loans. Payday lenders offer small amounts that are enough to pay off urgent bills, like suppliers’ invoices, balances for rent and utilities, and credit card debt. The credit score requirement for payday loans is low, and lenders are hands-off on how borrowers use the money. As a result, struggling employed entrepreneurs turn to payday lenders to pay for their business’ needs.
The downside is that these loans have high-interest rates — as high as 35% and up to 500% in APR (annual percentage rate).
You’d think that once presented with the rates, borrowers would know better and will find a more reasonable and affordable alternative instead. The problem is that many borrowers do not realize the situation they’ve entered. Some also have very little choice in the matter: they don’t qualify for traditional loans, so their only option is to take out short-term, high-interest, payday loans.
The Common Pitfalls of High-Interest, Short-Term Loans
Below are some of the challenges payday borrowers face:
- Encouraged by how fast and easy it is to get approved for payday loans, borrowers apply for the maximum loan they can get.
- They must pay back the loan plus the interest on or before their next payday.
- Payday borrowers who don’t have enough to pay back their entire debt have no choice but to pay the minimum. The loan continues to roll over to the next month.
- If they still don’t have enough to repay their loan and interest in the next months, it becomes harder for them to get out of the debt cycle.
It’s plain as day: these loans, while well-meaning, can be more harmful to borrowers if they don’t know how to manage their repayments.
Tips for Managing Payday Loans
The best way to avoid payday loan trouble is to not apply for a payday loan in the first place. We must, however, acknowledge the fact that employed people who earn extra from a small side business cannot borrow business loans the traditional way. They are candidates for applying for payday loans.
For their benefit, here are some tips on how they can reduce the burden of repaying payday loans.
- Borrow only what you need. The bigger the amount you borrow, the bigger the interest you need to pay.
- If you must borrow from a payday lender, send your application immediately after your payday. This gives you more time to raise the money for repaying your principal and
- Avoid rollovers because you’ll end up paying more than the amount you borrowed (and you’ll still be in debt).
- Use your loan to generate income from your side-business. Restock your supplies, buy raw materials or ingredients, or hire a part-timer who can help you create your products. Channeling payday loans towards income-generating ventures rather than simply paying off bills increases your chances of pay your entire loan on time.
- Find out if your lender offers alternative repayment schedules. Some might offer a minimum payment from which a portion would go to the principal. Grab this opportunity if offered: it would allow you to slowly get out of debt as opposed to simply paying interest fees each month.
- Reduce your spending and commit yourself to a budget.
While not ideal, payday loans can solve your most urgent cash needs; and, when you use the money wisely, it can help you get your side-business back on track. Take these tips, manage your money properly, and pay off your loan as quickly as possible.