Why Payday Loans Are Bad
Strapped for cash? Need cash quick? Need your pay in advance? Yes, we have all heard these questions before. From the catchy jingles to the paid promotions where someone desperately needs money, and they have their problems solved with a quick an easy click of a button. Payday loans seem like a convenient product for people who need it. But are they as helpful as they make themselves out to be?
A payday loan is essentially a short-term loan. Usually ranging from $100 – $5,000, a payday loan can be used for financial emergencies or as a small buffer to help you get by until your next paycheck. The concept seems simple. As in most cases, you are able to apply online and receive the cash within 60 minutes! This quick and easy means of money, however, has its drawbacks. You see, once you have submitted that application to receive your $300 in advance, you will quickly open up the real can of worms that is payday loans. We are going to cover in this piece why payday loans are bad. We are going to explain how they can begin a vicious debt cycle and reasons why we advise you to stay away from them, if you do not consider yourself financially secure.
Payday loans are quick and easy, and can be done online, with you having the funds within 60 minutes of applying. This seems fine and dandy, but the issue with this is the fact that it doesn’t protect people from irresponsible borrowing. Payday loans do not require credit checks so anyone can get one, regardless of their financial position or credit history. Once you have submitted the application, you will be locked into receiving the funds and obligated to pay them back in the selected time period with the additional interest and fees added on. It’s this convenient process that makes them dangerous for those who are in desperate financial positions. Because it is a lot easier to get help from a payday loan now, then to ask for help and let someone know about your situation.
One of the main reasons why payday loans are bad is because of the costs you incur while paying them off. An average personal loan will have an APR of 14.95%, and a credit card would be around 25.95%. A payday loan, on the other hand, would have an average APR of 400%! This sound extreme at first but if you keep in mind that APR stands for ‘Annual Percentage Rate’ and the repayment periods could be one week to a month, the interest charged may not be that high. The real issues come with the fees involved if you are unable to pay the amounts back. Because when it comes time to repay your borrowed cash, and if you are unable to, the rollover fee will add more to the amount, making it even harder to pay it back next week.
Example: You may have a $300 payday loan with a one week term. If the company attempts to make a direct debit the following week, but you are unable to pay it, you might be charged with a rollover fee of $40, which is to be added to the total amount that you are required to pay back the following week. So now you have an extra week to pay the $340, which is actually even higher now as interest had been added on every day.
It’s this subtle rollover option that payday loans offer, which begins the cruel debt cycle.
The Debt Cycle
A debt cycle is when you have debt that you are unable to pay off, so you go and get yourself in more debt in order to temporarily fix it. This action unfortunately just makes the situation worse as now you owe even more money, and your repayment term may be way longer. Payday loans are the worst at creating this cycle because you are expected to pay such large sums at the end of a week or two, and if you are unable to, then the amount is made even larger. What also makes it worse is the fact that the APR is compounded daily, so the longer you have the loan, the worse the interest becomes. This added interest and fees quite often leads people to get out another payday loan just to pay off their existing one quickly. This eventually creates a cycle that can spiral out of control if you are unable to take care of it. This is what makes payday loans so bad because a mere week advance on your pay can result in a repayment term lasting the rest of the year and debt that far exceeds the initial borrowed amount.
Payday loans can be useful if emergencies pop up and you know for certain that you are able to pay them back within the given time period. Not being able to repay them though, can lead you down an ugly cycle that results in more debt and ends up costing you far more than you had initially borrowed. Payday loans are risky, and there are other alternatives that you should try out before you resort to this. Borrow responsibly and always ask for help before you lock yourself into commitments that you might not be able to handle.
If you would like more information on payday loans or sourcing emergency money, we suggest these great reads: