• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Education
  • Career
  • Investment & Money
  • Accounting & Taxation
  • Transportation & Logistics
  • Industries

Business Finance Articles

Your First Financial Choice....

  • Business
  • Commerce
  • Management
  • Insurance
  • Banking Finance
  • Marketing & Advertising
  • Tech

Why Should You Be Cautious Of Payday Loans?

Last Updated on February 26, 2020 By Naomi Lawson Leave a Comment

Payday loans which are sometimes referred to as cash advances or check loans, are short-term loans at high interest rates, typically around $500 or less, that is due on your next payday along with fees. 

These loans may be marketed as to help people to bridge the gap between their paychecks and unexpected expenses. But the Consumer Financial Protection Bureau says that payday loans can become “debt traps.”That is the reason, you should be cautious of payday loans.

The former president of United States of America Obama said, “If you lend out money, you have to first make sure that the borrower can afford to pay it back”.

President Obama gave above statement when The Consumer Financial Protection Bureau, a federal consumer watchdog group, just released plans to further regulate payday lending, a practice that’s viewed as predatory to consumers.

While payday loans are certainly popular, they are often criticized as charging exorbitant fees and interest rates, setting up borrowers to fail and setting them further back financially.

Table of Contents

  • How does Payday Loans Work?
  • Why are payday loans bad? The Problems Related to Payday Loans
  • High Annual Percentage Rates (APR)
    • Short Terms
    • Additional Fees
    • Payday Loans Won’t Help to Build Credit
    • Target of Payday Lenders
    • Why Are They So Disadvantageous?
    • Do People Take Out Payday Loan Once?
    • Is It Detrimental To Take Payday Loans More Than Once?
    • Other Alternatives of Payday Loans
    • Outcome

How does Payday Loans Work?

Payday loans are marketed with different name such as cash advance loans, deferred deposit loans, check advance loans or postdated check loans — but they typically work in the same way.

If someone is in financial crisis and needs cash fast before he get his next paycheck,  whether for an emergency, to pay a bill, fix their car, buy groceries, or any other reason. They can apply for a payday loan.   The lender verifies his employment, bank account, and documents some other information.

And then approves an immediate loan for a certain dollar amount. The borrower may need to write a postdated check made out to the lender that is dated for the same day when his paycheck comes.

Due date of loan payment is usually by your next payday, generally in two or four weeks. Many states allow payday loan lenders to cash your check and get loan paid off with accompanying fee charges. Different states allow lenders to charge from $10 to $30 for every $100 borrowed.

Why are payday loans bad? The Problems Related to Payday Loans

The Pew Charitable Trusts estimates that every year in the United States, about 12 million people borrow nearly $50 billion through payday loans. Majority of payday loan borrower are employed and of lower financial status.

In cash emergency people often opt for payday loans as it may provide instant cash you may need. But before applying you should be aware of payday loans problems.

High Annual Percentage Rates (APR)

If a person gets a two-week $500 loan that charges $15 in fees for every $100 he borrows. According to the CFPB, the Annual Percentage Rate of above mentioned loan will be almost 400 percent.

Short Terms

Payday loans also known as short-term loans as you typically need to repay a payday loan within two to four weeks of the initial loan.

Additional Fees

You may have to pay additional fees on top of the initial loan fee if you don’t manage to pay back the loan within the short amount of time. According to CFPB, nearly a quarter of initial payday loans are re-borrowed nine times or more.

  • Non-sufficient funds charges, if you don’t have enough money in your bank account at due date to repay your loan. Then additional charges will be add on top of the initial loan fee.
  • If you do not repay loan on time then you have to pay late fees or return payment fees.
  • If you are unable to pay your loan on time and want to reschedule your loan’s due date. Then you will be charged with rollover fees on top of the original loan and initial fees.

Payday Loans Won’t Help to Build Credit

Short term payday loan lenders usually do not report your payment history to the credit bureaus. That is why; payday loan is not helping you build credit.

Target of Payday Lenders

People with limited financial education, weak credit, and in low-income areas are target of payday lenders. Just to achieve their target market, they follow payday loan laws. Each US State has its own laws, Residents of Louisiana may refer to Louisiana Payday Loan Laws.

Focus on to scrutinize people who are uneducated or desperate for credit. As these people don’t understand technical terms. So they give business to these lenders in form of higher interest rates and additional fee charges.

Why Are They So Disadvantageous?

Big difference between credit card and payday loan is finance charges. Although finance charges on payday loans run around 15-30% of the amount you borrow. First thought strike to mind as it is same as of expensive credit card finance charges. But it is not.

The reason is credit card interest rates are spread out over a whole year while payday loan charges are amassed in a very short time. APR of payday loans would be around 800% in some cases.

Generally borrower has to pay cost 35 times more than borrowing money on credit cards. If you borrow money for home mortgage or auto loans to then the loan can cost may up to 80 times.

Do People Take Out Payday Loan Once?

Researches show that taking out payday loan is a recurring pattern. The Consumer Financial Bureau Stated that 64% of payday loans is extended multiple times which result in fees that are more than the original loan amount.

Only 15% of easy to get payday loan borrowers to pay the loan on time within 14 days and rest of them take out six or more quick cash payday loans a year or rolled over their loan within just two weeks.

Is It Detrimental To Take Payday Loans More Than Once?

When you take out payday easy loan often, it starts building a trap that spirals their finances out of control. Overextended finances and more loans with high fees and interest rates make borrower spent a good amount of their checks once payday hits, and will find themselves short of cash again very quickly, taking out more loans. In this way, this stuff gets crazier.

Other Alternatives of Payday Loans

Financial advisers suggest that although payday advance loans seem like a quick fix. It is better to prefer other options such as; borrowing from a friend or family, asking your employer for an advance, or even taking out a cash advance or make purchases on a credit card.

Outcome

If you are in a financial emergency and need cash now then payday loan seems the easy way out. But it may end up making your problem worse with their huge fees.

But no matter what you do, it is suggested to educate yourself about the risks and pitfalls of various loans. It is better to look for payday loans alternatives. Take help from credit counselors to develop a budget and work on starting a saving account.

Filed Under: Banking & Finance Tagged With: Bad Credit, Loans, Payday Loan

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

I accept the Terms and Conditions and the Privacy Policy

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

Risk vs. Reward: The Wise Way to Invest

Every good investor has a strategy. You wouldn't apply … [Read More...] about Risk vs. Reward: The Wise Way to Invest

Benefits and Drawbacks of HughesNet

It’s so difficult these days to find a stable internet … [Read More...] about Benefits and Drawbacks of HughesNet

Minimum Wage in Virginia

Most companies and corporations are confined to meet … [Read More...] about Minimum Wage in Virginia

Expert Tips in Marketing Your Business

Are you thinking of starting your own Limited Liability … [Read More...] about Expert Tips in Marketing Your Business

ELSS VS PPF: Which Investment Option is Better For You

As both ELSS and PPF schemes help an investor to save … [Read More...] about ELSS VS PPF: Which Investment Option is Better For You

8 Intriguing Education Fields for Creative People

Most people grow up and have a good idea of what they … [Read More...] about 8 Intriguing Education Fields for Creative People

Top Promotional Items You Can Choose to Advertise Your Small Business

Promotional products bring instant brand recognition … [Read More...] about Top Promotional Items You Can Choose to Advertise Your Small Business

How to Choose the Top-Performing Account-Based Marketing Firm

Account-based marketing (ABM) is a business growth … [Read More...] about How to Choose the Top-Performing Account-Based Marketing Firm

How to Prepare General Knowledge (GK) for Competitive Exams?

Preparing the General Knowledge (GK) portion has been a … [Read More...] about How to Prepare General Knowledge (GK) for Competitive Exams?

How Does the CRM Software Help Financial Services Providers?

The financial services business model is quite diverse … [Read More...] about How Does the CRM Software Help Financial Services Providers?

What Is the Minimum Wage in Texas?

Meeting the federal requirements and acquiescence with … [Read More...] about What Is the Minimum Wage in Texas?

Fortiva Credit Card Reviews

Wanting a credit card without paying security deposits? … [Read More...] about Fortiva Credit Card Reviews

The Best Tools for Financial Analysts to Use in 2021

Predicting financial trends isn’t easy, regardless of … [Read More...] about The Best Tools for Financial Analysts to Use in 2021

Types of Life Insurance – Which one is right for you

Are you considering taking out life insurance to … [Read More...] about Types of Life Insurance – Which one is right for you

Which are the Quality Improvement Techniques widely used by the organization?

Quality improvement is a systematic approach assessing … [Read More...] about Which are the Quality Improvement Techniques widely used by the organization?

How to Choose an Accountant for Your Small Business?

Sometimes an entrepreneur comes across loads of … [Read More...] about How to Choose an Accountant for Your Small Business?

FC LeoGaming Pay CEO Alona Shevtsova: New payment habits that will stay with us when the world leaves the period of pandemic

In recent years, all the habits of the customers all … [Read More...] about FC LeoGaming Pay CEO Alona Shevtsova: New payment habits that will stay with us when the world leaves the period of pandemic

Questions to Ask Before Buying Used Pallet Racking Systems

Space and storage are crucial when it comes to … [Read More...] about Questions to Ask Before Buying Used Pallet Racking Systems

4 Major Benefits of Being a Sole Trader

There’s little doubt that being a sole trader is the … [Read More...] about 4 Major Benefits of Being a Sole Trader

Things to know about FHA Loan Eligibility

All families, either rich or poor, deserve a safe and … [Read More...] about Things to know about FHA Loan Eligibility

Most Viewed

Advertising Business Growth Business Ideas Business Needs Business Tips Career Advice Career Development Career Guide Career Options COVID-19 Credit Card credit card reviews Debt Management Differences Employee Entrepreneurship HRM Import-Export Importance Investment Loan Provider Loans MCQs Online Marketing Organization Pakistan Partnership Past Papers Payday Loan Payday Loans PPSC Production Pros Cons Quick Money Tips Roles and Duties Startups Strategies Students Help Tips Top10 Types UK UK Banks University USA

Recent Comments

  • Anpan Bismark on PPSC MCQs: Curriculum Development
  • Anpan Bismark on PPSC MCQs: Curriculum Development
  • Aisha on PPSC MCQs: Curriculum Development
  • Hat on Successful Small Business Ideas 2021
  • Nikki on PPSC MCQs: Curriculum Development
  • SAAMI JAWAID - on What are trade meaning, nature, and different types of trade?
  • Sahar jabeen on PPSC MCQs: Curriculum Development
  • samia azhar on PPSC MCQs: Curriculum Development
  • Pine on Currency.com Review – The Best and Unique Features That You Should Know About
  • Flemming Nielsen on Should or Shouldn’t you go for Global CTB

Footer

  • About US
  • Contact Us
  • Blog
  • Comment Policy
  • Terms & Conditions
  • Privacy Rights
  • Privacy Policy
  • Follow on Google News
  • Follow on Facebook
  • Follow on Twitter
  • Follow on Medium
  • Entrepreneur Skills
  • Business Cycle
  • Business Ideas
  • Speculator
  • Be Wealthy
  • Psychology in HRM
  • HRM in Business
  • Businessman Qualities
  • Salespeople Types
  • Health & Business
  • Business Success Rules
  • Stress At Work
Copyright © 2018 BFA - DMCA.com Protection Status .