You must have come across tons of blogs where people have advised you to go for payday loans in case of emergencies, especially if you have bad credit. But that isn’t always the best option. In this article you will see why. But first, let’s start with the absolute basics.
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What are payday loans?
For people who need immediate cash even when they have a low credit rating, a payday loan is often their answer. Payday loans are short term loans that are given in cash form to people who are often high-risk borrowers. Since the person may have a high chance of defaulting on the loan, the interest rate is often quite high. The loan limit is usually less than $500 and is to be paid within the next few weeks maximum.
Why do so many people use Payday Loans?
People often find themselves in a financial emergency where they need a specific amount of cash immediately, and when you find yourself in such a financial crunch, you go to a commercial bank or a credit union to get a loan. Now, since you’re a high-risk borrower, you’re rejected on getting the traditional loan.
Statistics prove that more than 69% of people have less than $1000 in savings! This means in the case of an emergency, they will have no other option than to go for a payday loan. This is why the market is so popular and why people blindly opt for such a loan.
Why are Payday Loans bad?
Where payday loans may give you a few weeks of ease in relieving your financial burden, they also have several months of distress ahead. And sometimes you really have to weigh the pros and cons before making a decision. It may not always suit you at the moment, but it is also saving you from a dark hole.
Here are some reasons why payday loans should be avoided as much as possible.
High Interest Rate
The crazy amount of interest that is charged with the loan is appalling! Here’s an example to prove our point.
Let’s assume you acquired a loan of $500, and you have to pay back $575 in the next 2 weeks, the interest rate being 15%. Note that the $75 is charged in only two weeks, so if you annualize the interest for two weeks, the rate becomes 300%. This is actually a concerning figure! A person who doesn’t have $500 today, will most likely not have $575 two weeks later, therefore his chances of defaulting on the loan are extremely high. This is one of the biggest dangers of payday loans.
Payback in a few weeks
Another one of major disadvantages for payday loans is the fact that they’re short-term, and you only get around 4-6 weeks to pay back the loan WITH INTEREST! People with financial emergencies find it so hard to pay back the loan in the next few weeks especially with the current income they have. Say goodbye to peaceful sleep and stress-free mornings!
The vicious Debt Cycle
The debt cycle goes round and round. If you’re relying on methods of fash cash such as payday loans, and you’re unable to pay them back, the cycle continues. You will acquire another loan to pay this one, and then a few weeks later another loan to pay that one. It really just continues. In such a situation all you can wish for is Santa to give you a loan gift deed!
Moreover, the risk of extending the loan each time you’re unable to pay will end up piling all the outstanding fees and dues. The interest rate will also be liable on each extended week, which will make your sum so much greater than what you originally borrowed. Payday loans are literally like a dark pithole; too difficult to get out of.
Risky getting out of the loan
Payday loans give you a very small amount of loan, but lenders could have you fall back on bills, rent and other major expenses. Getting out of the loan requires a lot of planning and budgeting, and let’s be honest, if you were THAT good at budgeting and had savings, you wouldn’t have needed a payday loan in the first place. This temporary solution of having fast cash for emergencies can put you in a financial crunch for the next several months, so make sure you know exactly what you’re getting yourself into.
Is it all bad?
Well, there are obvious reasons why you should definitely be cautious of payday loans, but there are people who have only a small phase of financial emergency and are able to pay back. For such people payday loans really work. They really come to the rescue when you have an emergency like a medical treatment or repairing your car, but there are always two sides of a coin.
Paying back your payday loan on time MAY help with your credit rating too, but that’s still not guaranteed. And if you’re a high risk borrower today and resort to payday loans because you’re rejected from traditional loans, that really isn’t helping your credit case.
The best way of making the most of the situation is asking for a friend or relative to lend you some money based on the current market interest rate. This way you can choose how many months you want the loan to be, instead of weeks. You will have more time to pay them back without additional costs piling up on the already surging loan. But don’t take this favour for granted, make sure to ask for an adequate amount of loan- an amount you’re sure to return back when the duration ends.