Why Should You Be Cautious Of Payday Loans?

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 are due on your next payday along with fees. 

These loans may be marketed 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 the 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 the 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.

How does Payday Loans Work?

Payday loans are marketed with different names 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 gets 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.

The 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 the 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 Trust estimates that every year in the United States, about 12 million people borrow nearly $50 billion through payday loans. The majority of payday loan borrowers are employed and of lower financial status.

In a cash emergency, people often opt for payday loans as they 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 the above-mentioned loan will be almost 400 percent.

Short Terms

Payday loans are 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 a 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; a payday loan is not helping you build credit.

Target of Payday Lenders

People with limited financial education, weak credit, and low-income areas are targets 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 scrutinizing 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?

The big difference between credit cards and payday loans 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 the same as 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, the borrower has to pay a cost 35 times more than borrowing money on credit cards. If you borrow money for a home mortgage or auto loan to then the loan can cost may up to 80 times.

Do People Take Out Payday Loan Once?

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

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

Is It Detrimental To Take Payday Loans More Than Once?

When you take out payday easy loans 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 borrowers 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 a 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.