Being caught in a debt cycle can be an overwhelming experience. It becomes more problematic if one is caught in a payday loan cycle. Reports have shown that a large percentage of Americans are caught in a payday loan cycle.
It is usually very difficult to escape from a payday loan web. The reason is that most payday loans come with a large interest rate that makes it almost impossible for debtors to comfortably pay them back. Most people who take out payday loans end up running into greater debts with time.
Why Payday is a Catch
You may be wondering why people still go ahead to get a payday loan when it is not a good loan option. Notwithstanding the stress that comes with such debts, people still patronize payday loan lenders because of the following reasons:
- It is easy to access: unlike loans from traditional banks and credit institutions, payday loans are among the easiest loans to obtain. One can get their loan request approved in a matter of minutes from the comfort of their homes. Most lenders do not require the borrower to come to their office before approving their loans. Everything can be done online and funds released once the borrower provides all the required information.
- Does not require one to have a high credit score: one’s credit score plays a huge role in determining how much funds they can access and the ease at which funds are made available to them. This is so true for most traditional banks. Once the credit score of the borrower is low, most lenders will not be comfortable approving the loan. However, many payday loan lenders overlook the borrower’s credit score and release the funds to them.
- Comes in handy in emergencies: people face different emergencies that may require them to make an urgent financial commitment. Such situations include medical emergencies, daily upkeep, house rent, and others. These urgent needs most times put people in a situation where they are faced with no other option than to resort to payday loans to take care of these emergencies.
Downsides of Payday Loan
Many people have described payday loans as a trap. Notwithstanding the perceived benefits that may come out of a payday loan, it has made a lot of people end up in a debt cycle. You may be wondering what the downsides of a payday loan are. They include:
- High-interest rate: whenever you think of payday loans, the first thing that should come to mind is that the interest rate is unusually high. The high interest is one of the reasons why many borrowers find it extremely difficult to pay back their loans within the scheduled time. Sometimes, the accumulated interest can be as high as the capital. This can worsen the financial state of the borrower.
- Short repayment time: the required time for repaying a payday loan is very short. Borrowers are most times expected to pay back their loan in a matter of weeks. This puts undue pressure on them, making it almost impossible to meet up with the payment deadline.
- Encourages debt cycle: borrowing especially for a purpose other than investment is not a healthy financial move. This kind of borrowing can land the borrower in a perpetual debt cycle. The ease with which people can access payday loans encourages them to borrow more thereby increasing the risk of ending up in a debt cycle.
- Encourages unhealthy financial behavior: many borrowers don’t understand that a payday loan is nothing but a temporary fix for financial problems. So while people see payday loans as a convenient alternative to taking care of their financial responsibility, such loan options end up encouraging unhealthy financial behavior. Being caught in a debt cycle can be an indication that one needs to look into their spending pattern. So, while a payday loan may seem like a fast option to finance personal expenses, it may in reality encourage people to spend carelessly.
How to End Payday Loan Cycle
It is possible to feel stuck after trying for a while to come out of a payday loan cycle. However, the following steps can help you escape the quicksand and make consistent progress towards financial freedom.
#1. Have a Personal Budget
Taking a payday loan frequently is most times an indication that you’re spending more than you should. One of the ways of putting a check on your spending is to have a monthly budget. With a monthly budget, you can easily have a better understanding of your income and expenditure as well as how much you can afford to set aside for the repayment of the loan.
#2. Negotiate a More Manageable Payment Plan
If you are finding it difficult to repay the payday loan, then the ideal thing to do is to reach out to your loan lender and convince them to negotiate a payment plan that would make it easier to pay back. Let them know the amount that you can pay and ensure you stick to the payment plan.
#3. Have an Emergency Fund
The importance of emergency funds cannot be overemphasized. It is not just enough to pay off your payday loan. You will need to ensure you don’t get trapped again. People opt for payday loans to fund unplanned expenses. Therefore having a considerable amount of money set aside for unplanned expenses can help to ensure that you don’t resort to payday loans to finance these expenses when they come up.
Conclusion
It is always best to stay away from payday loans because of the different downsides that are associated with them. However, if you find yourself in a payday loan cycle, you will need to evaluate the situation and know the best way to go about paying off the debt.
