Payday loans can be a blessing and a curse. If used appropriately and sparingly, they can be a huge asset when you find yourself in a jam. That being said, they can also be very problematic. But just how hard are payday loans to pay off. Let’s take a look a little closer and find out.
What Are Payday Loans?
Before we get started, let’s talk for a moment about what payday loans are. Payday loans are short term, typically low dollar loans. The average payday loan is for around 300 dollars although they can be for more. It would be very unusual however to find a payday loan for more than 1000 dollars even though some states do not put an official cap on them.
The “payday” part of the term comes from the fact that the loans are due to be repaid when the borrower gets paid from work again. This makes the typical loan term just 10 to 14 days, in most cases. Because of this short loan term and the high fees involved, payday loans have very high effective APR’s. Because of this fact, many states have banned payday loans and there is a push to ban them in many more.
Why Can Payday Loans Be Hard To Pay Off?
The biggest problem with a payday loan is that it is a single installment loan. You must pay the loan back in it’s entirety on your very next payday. 10 to 14 days is not a lot of time and many people can not get their finances back on track that quickly.
The reason that most people get in trouble with payday loans is that they do not look down the road. They look at the immediate crisis and do not consider how they will pay back this loan.
Most payday loan borrowers obviously do not have a savings account. This is because they are living paycheck to paycheck, spending every dollar that they bring in. When an emergency happens, they do not have the money to pay for it, so they get a payday loan. What happens when the loan is due. If someone is already living paycheck to paycheck, how are they going to pay off a 500 dollar payday loan and still get by? They can’t.
What happens is one of two things. Either the borrower pays off the loan and then takes out a new loan to cover their expenses or they renew the loan paying a fresh set of loan fees. In either case, it is a cycle that is bound to be repeated over and over again.
When Should You Use A Payday Loan?
Payday loans are not all bad, they do serve a legitimate purpose in many cases. Problems only arise when the borrower does not consider whether they can afford to pay back the loan.
If you know for sure that you can pay back the loan and you absolutely need the money, it is okay to take out a payday loan. Before you commit, take the payment amount and put it into your budget. Is there enough room to cover your expenses and enough to pay off the loan?
Also, be sure to consider whether the cost of the loan is more or less than the cost of not having it. Compare the loan fees to overdraft or late fees. If the loan is cheaper and you can pay it back, take it.
When Should You NOT Use A Payday Loan?
If you do not know whether you can afford to pay back the loan, you should not take it, even if you desperately need the money. Without the ability to pay back your loan, you will simply find yourself in the same position in 10 to 14 days, only this time, you will have an expensive loan on your back.
Additionally, if you do not absolutely need the money, you should avoid the loan. These high fee loans are nothing to mess around with and if you can simply do without something, you should go that route.