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Why Should SAY NO To Payday Loans?
Payday loans are a tool that many use to get by until they get paid again. For those with really bad credit, they might be the only payment choice. So, they are not completely evil when used correctly. Some of the lenders in our network even offer payday loans and if you can not qualify for an installment loan, you might be offered one.
That being said, a payday loan should be your last alternative because they come with some rather large drawbacks.
Payday Loan Drawbacks
The biggest drawback to a payday loan is not the high loan fee, which I will get to, but the short loan term.
Loans are designed to be repaid in under two weeks in most cases. Think about that for a minute. You have a loan going to somebody who is probably living paycheck to paycheck, that is why they need a loan in the first place. Then you ask them to repay the entire amount on their next check. If they are already living check to check, how are they going to pull that off?
The truth is that they will not be able to. This results in one of two situations. Either the borrower pays the lender the loan fees for another week to extend the loan or they pay off the loan and immediately take out another one. This is known as the Payday Loan Trap.
Getting trapped in a Payday Loan Trap is a vicious cycle and is very difficult to get out of for someone that is already having a hard time making ends meet.
Another drawback of the loan, that I just hinted about, is the high loan fees. Fees can vary widely but an average fee might be something like $15 for every $100 borrowed. That would mean that if you borrowed $200, you would need to repay $230 when the loan is due.
On the surface, that probably does not sound too bad but you have to look a little deeper. When you factor in the short terms of the loan, you get interest rates of well over 400% a year. That makes for a nice little profit for the lender.
Of course, one can argue that these are very risky loans. If the interest rates and fees were not that high, not too many lenders would be in the business. Without the high reward, lenders would be unwilling to put their money on the line.
Problems People Have With Payday Loans
I recently, just for informational purposes browsed a few forums on payday loans. If you want to get some real life examples of the problems payday loans can cause, hit the forums.
The vast majority of posts were about people trying to get out of them. I will not name the forums and definitely not the person to avoid drawing undue attention to their problem.
One person I came across had 19 active payday loans that they were trying to deal with. 19 lenders trying to collect from a now way overdrawn checking account. The person is no doubt receiving tons of collection calls and under extreme duress.
This is a classic example of how the problem can snowball with a payday loan. You are not making enough money to get by so you take out a loan. Then, you are still not making enough money to get by but now have additional loan debt. So, what do you do, you take out more loans.
This continues for months until the persons entire financial picture crumbles.
The cause of this problem is twofold and the burden of guilt is not just on the lenders. Sure, lenders should make sure that the person taking out the loan is capable of paying for it. The problem is that they have a limited view of the applicants financial picture so it can be difficult to really assess what they can afford.
The borrower needs to take responsibility as well. You should only take out a loan if you know that you can pay it back for sure, you should not just hope that your money problems are getting better. You should also NEVER take out a payday loan unless it is your only option. Even then, if you know that you will not be able to repay it you should not accept it. It only delays the inevitable financial breakdown and makes it worse.
Sometimes people get into a loan situation when they have no idea what is going on. This is what a lot of payday loan providers want you to do.
There is a case of a woman who took out a $500 loan and was having $90 payments taken out of each check. She though this was paying off the loan slowly but after a year, she questioned the company and found that the $90 a check was simply renewing the loan and no principal had been paid off. She still owed the principal of $500 plus a $90 fee.
The situation could have been prevented by reading the loan paperwork but people seldom do.
This is another reason to avoid payday loans. They can be tricky but the overall fault is on the borrower. You must read your loan contract and understand what you are getting yourself into.