Most of us are entirely too familiar with the feeling of finding ourselves in an emergency without the finances that’ll allow us to deal with it.
Payday loans were designed to help you out of such circumstances. In essence, this type of loan is a small cash advance to see you through to your next paycheck. Unfortunately, courtesy of this credit, many people often find themselves trapped in a cycle of debt.
Instead of dealing with their problems head-on, many consumers opt to take out more than one payday loan. Although it may provide short-term relief, this type of lending is associated with exorbitant interest rates and typically has to be paid in full within a couple of weeks, resulting in a financial burden that can take years to get out of.
So, to avoid the probability of ending up in a debt trap with hidden fees and endless rollovers, we present you the risks involved with payday loans.
Payday Loans Are Not Easy to Get Out Of
Many consumers that opt for payday loans find themselves in financial hardship. People that can’t afford to make the repayments often end up borrowing money again to make up for the cash lost on settling the existing credit, dumping them in a debt cycle. This situation can become complicated to get out of.
High Costs
Payday lenders aren’t required by law to disclose their annual interest rates. Although an APR of 20% on the borrowed amount plus an additional 4% per month may seem fair, it translates into exceptionally high fees when calculated over twelve months. Not to mention all the extra charges that only get explained in the small print.
Compared to mainstream banks that charge an annual APR ranging between 8% and 15%, payday loans are costly.
Direct Debit Repayments
Most payday lenders have their repayments deducted from your bank account by direct debit, resulting in them withdrawing their money before you have the opportunity to cover your expenses. If you can’t afford the loan settlement, cancel the debit order, and arrange an affordable down payment plan with the firm.
The Urge to Borrow Again to Repay the Previous Loan
Many consumers submit to the urge to borrow money again to repay their previous loan. Unfortunately, this behavior thrusts them into a cycle of debt, which isn’t easy to get out of. If you’ve got no alternative, it’s essential to borrow less every time, thus reducing your overall debt over time.
Payday Loans May Affect Your Credit Rating
More often than not, failure to repay your loan due to excessive fees negatively affects your credit rating. If a bank rejected your application, it’s most likely due to a bad credit rating or because the additional repayments might potentially put you in financial hardship. If this is the situation, you should see it as an eye-opener and consider that you might not be able to afford the repayment.
Exorbitant Default Fees
If you fail to make your loan repayment, the lender usually charges a default fee that’s automatically added to your debt. This number can quickly add up to be twice the amount you initially borrowed.
To Wrap Up
In essence, payday loans are structured to help people get out of emergencies. Unfortunately, this system is more often than not misused and abused. Before you opt to use this lending system, be sure that you can afford to make the repayment and familiarize yourself with the pitfalls.
Payday loans are by far the easiest way to fall into a debt trap.