When you need money fast, a payday loan seems like an enticing idea at first. It allows you to get the cash you need within the same day, with a promise to pay it off by your next payday. However, there are many reasons why you should avoid this type of loan at all costs.
A payday loan is a very short-term loan. You hold the loan for a week or two and pay it back as soon as you get your next paycheck. You can find most payday loans offered online apart from those you see in storefronts. As a part of the loan process, you will give the lender a postdated check dated two weeks later.
Once the deadline hits, the lender will cash in the check and take your payment for the loan.
A payday loan sounds simple when you first hear about it, but there’s always a catch. Here are some of the reasons why you should avoid payday loans at all costs:
The interest rate of payday loans is insurmountably high. You will pay back way more than you borrowed. For example, if you have a credit card with high interest, you’re often paying around 28 to 36% interest rate per year.
When you’re handling a payday loan, the most common interest rate has an APR of around 400%. For getting access to a loan without the need for a credit check along with a faster turnaround, you’re often paying nearly half of what you borrowed as interest. That doesn’t include any other fees the lender may have imposed.
Imagine this scenario, you get a payday loan, knowing that you’ll have enough money in your bank by the deadline. A few weeks later, you find yourself in a medical emergency, using up what little money you have left. When the deadline is due, the check will bounce. You’re going to pay the bank fees and will have to talk to the lender again to try and renegotiate a deal.
What usually happens is you have to take another loan to pay off your old loan. The money you owe increases, and it can spiral into debt. It doesn’t even have to be as dramatic as a medical emergency. Some people forget that they also have their bills due, leading them to miss payments.
Payday lenders are ruthless, and some even act like loan sharks. If you cannot pay, you’ll get all sorts of pressuring calls and messages from debt collectors. They will threaten to file a lawsuit and even call relatives and close associates. There are even cases where a lender may try to withdraw from your bank account multiple times, resulting in charges from your bank.
While a payday loan will not have any hit on your credit score, it might begin to break once you miss out on a payment. If the lender decides to push your case to court, it will reach credit agencies. The debt and litigation record will hit your score, and it will take years for you to recover from that. Many people get into payday loans thinking it won’t affect their credit, but any debt once reported can affect it severely.
Payday lenders know who to target with their services. They usually go for the naïve or those too young to understand the consequences of their actions. With unsavory practices, you won’t have any form of comfort as long as they’re breathing down your neck. Studies show that most customers have to take out multiple loans a year because of reliance and debt problems.
A payday loan may seem like a never-ending cycle, but there is a way out. There are many alternatives, and you can set up other plans to help stop the loans before they spiral out of control.
If you’re interested in learning more about managing your debt and other financial strategies, take a look at our debt courses at Wealtheo™. You can learn everything you need, from loan alternatives to debt planning and more.