Payday loans can be incredibly dangerous to your financial health, especially if you're already struggling with debt. With the expensive fees and the ability to extend loans more than once, you can easily find yourself in a debt cycle, a collection effort target, or both. One of the biggest pitfalls that can occur with payday loans is when a borrower enters a cycle of repeated loan extension. They are unable to repay the loan on payday, so they extend the loan for another repayment period.
They continue to spend borrowed money and, in the meantime, fees continue to accrue. It is a vicious cycle and can continue indefinitely, since there is no limit to the number of times a person can get this type of loan. Although many people assume that payday lenders charge high interest because they deal with high-risk customers, default rates are usually quite low. Many states now regulate interest rates on payday loans and many lenders have withdrawn from states that do.
Most of those who rely on payday loans use them to fill a financial gap in their budget, whether for emergencies or to cover the cost of necessities such as rent or utilities until payday. The problem is that it can be an endless cycle. Payday loans are financially dangerous and can lead to even greater financial problems. The main danger of applying for a payday loan is that you can quickly get stuck in a debt cycle. Although a payday loan normally costs a fairly low sum of money, such as £200, it's easy to get caught in a cycle of applying for a new loan every month to cover the same deficit or a larger deficit.
This problem is aggravated if you apply for loans from more than one lender. The main problem with payday loans is that you have too little time to pay the full amount you owe. In fact, you usually only have a few weeks at most to calculate the total value of the loan. This is a far cry from traditional personal loans, which you can repay in several years. Because of its high interest rates and fees, the risk of applying for a payday loan is that you will get into more money trouble.
This happens to a lot of people. They could use a payday loan to cover rent and avoid eviction or utility bills to avoid outages, but huge interest payments usually leave them in a worse state. Some desperate borrowers continually apply for payday loans when they can't catch up enough to pay the original balance. The term of payday loans is so short that many borrowers can't raise enough money to repay on time. Payday loans are easy to obtain and don't require any kind of credit check, making them more accessible than a personal loan or even a credit card cash advance.
Payday lenders use different methods to calculate interest rates, often demanding almost 400% on an annualized basis. But, often, this is a better alternative than getting an unsecured payday loan and receiving exorbitant rates that lead to a dangerous debt spiral. People who use payday loans usually continue to fall further and further behind in this way, and the commissions add up to a real fortune. This increases the likelihood that you will be caught in a continuous cycle of taking on expensive payday debt. But “taking care of pennies” as the old saying goes really translates into significant savings over time, and making the right choices and trying to avoid applying for payday loans can make a big difference to your future financial situation. The Consumer Financial Protection Bureau (CFPB) wants payday lenders to verify consumer income, major financial obligations and loan history. Payday lenders advertise on TV, radio, online and by mail, targeting workers who can't arrive paycheck-to-paycheck.
But as payday loan revenues decline, subprime credit card issuers have made big profits, keeping the level of all subprime consumer loans relatively constant in recent years. Payday loan stores are open longer than normal bank hours, allowing you to easily access cash regardless of the time of day. Even if you only have the loan for a few weeks, you're likely to pay much more interest with a payday loan than with a personal loan or even a credit card cash advance. Payday lenders used to set up shop just beyond the perimeter of military bases, attacking soldiers and their families. In conclusion, it's important to understand that taking out payday loans can be incredibly dangerous for your financial health. With expensive fees and the ability to extend loans more than once, it's easy to find yourself in an endless debt cycle or become targeted by collection efforts. It's important to make sure you understand all aspects of taking out these types of loans before committing yourself.