You may think that a payday loan is the best way to take care of those emergency needs before your next paycheck arrives. Think again! Payday loans are a debt trap. On the outside, it may look all rosy and attractive but on a closer look, you will come to realize that taking out such loans may end up hurting your finances.
Every financial decision comes with a level of risk. However, there are lots of risks associated with payday loans. What are these risks you may be wondering? Let’s dive in.
#1. The danger of running into a debt cycle
A debt cycle is continuous borrowing that results in more borrowing. This is the real danger behind payday loans. The timeframe required to pay back such loans is usually short so many people don’t get to pay back by the due date.
Placed in this kind of situation, you may have no other choice than to take another loan to make up for the shortfalls. Once you get into a debt circle, it is usually very difficult to come out of it.
#2. Renewal fees
Payday loan debts are high-risk debts. If borrowers default in payment, they are given two options- to take another loan or renew the previous one. For instance, if you take a loan of $300 with an interest rate of $50, you may be expected to renew the loan every two weeks. At the end of 3 months, you must have paid $300 in interest without paying the principal. Since these loans are always targeted at low-income earners, it becomes almost impossible to break free from debt.
#3. Debt collection method
The debt collection method employed by payday lenders is not conventional. One of the requirements of such a loan is that you grant the lender access to your checking account. In a situation where your checking account is empty on the due date, the lender may initiate withdrawal which in turn means you get to pay bank fees for such transaction.
The lender may continue to make withdrawal requests thereby accumulating a sizable amount of bank fee for you to pay off. Other methods payday lenders can employ to collect their money includes incessant calls, texts, and letters from lawyers. They can also go as far as selling your debts to a collections officer who can sue you and take over your assets if they win the case.
#4. Impact on your credit
Unlike traditional banks, payday lenders do not care much about your credit standing before giving out a loan. This does not however mean that your inability to pay will go unnoticed by the credit bureaus. Even if you pay on time, your promptness in payment will not be reported to the credit bureaus. This prompt payment does not in any way increase your credit score.
Conclusion
A payday loan may look like an easy bailout for you but it doesn’t come cheap. The risks associated with it far outweigh the perceived benefits. You may have to use a payday loan as a last resort after you have exhausted all other options to raise money.
