A lot of people take payday loans for a quick financial fix. But most times, the reverse becomes the case. Instead of fixing the challenge, it becomes the challenge itself.
Do not think that because a payday loan is unsecured, it won’t pose a threat. Or that a payday loan is the only way to settle an emergency bill or pay off another debt; unfortunately, it is not.
The fact is that a payday loan will cost you more than that financial challenge you have. It’ll add up way more than the personal loan you are avoiding.
How is this so?
Keenly follow this post and discover how a payday loan can be a trap.
Payday Loans Involve High-Interest Rates
One of the traps of payday loans includes high-interest rates. For every $100 borrowed, payday lenders charge interest of $15-$20. Thereby raising the average annual percentage rate (APR) to about 600% or more.
For instance, you took a payday loan of $200 to pay back in 4 weeks, with an interest charge of $20. You will pay $240 due to the principal interest charge. And if per adventure you were only able to pay back in 3 months, you’ll end up paying a total of $260.
Payday Lenders Charge Late Fee Payments
If you do not pay back the loan within the agreed period, you’d have to pay an additional fee on top of the loan. On top of that, those fees can start adding up when your debt rolls over. Then you find yourself borrowing, again and again, to pay up.
Payday loan lenders make a huge percentage of their money from borrowers stuck in payday loans. Four out of five payday borrowers default or renew a payday loan over a year.
Again, assume you took a $200 loan to pay an emergency bill and you’re charged an interest rate of about $20. Ideally, you’re meant to pay $220 within the stipulated time.
If you’re unable to repay within the deadline given, you may be charged an extra $100 on top of your loan making you pay way more than you should.
Payday Loan Involves Insufficient Funds Charge
You may not be aware, but your payday lender will charge you a fee if you do not have sufficient funds available in your bank account to cash your check or electronic debit from your account.
Every unmet requirement attracts a fee. Continuous borrowing to settle old debts attracts more interest charges. With time your loans culminate into a large unpayable loan, which might leave you no choice but to file for bankruptcy. This is a debt trap!
Conclusion
The high-interest rates of payday loans make it hard for borrowers to pay off their loans while covering normal living expenditures. As a result, the average borrower is pressured to take more payday loans to offset the previous loan, not knowing it is a debt trap.
Therefore you must understand what a payday loan entails before venturing into it. And if you are stuck in a payday loan trap, you can apply for a payday loan consolidation.
