You might be considering payday loans if you’re struggling to pay your bills each month. In fact, these loans can be extremely dangerous if you’re unaware of how they work. Below are three reasons why you should not consider a payday loan unless there are no other options available to you.
What is a payday loan?
These are short-term loans between $100 and $1,500. Typically, individuals take out this type of loan from a payday lender to meet an unexpected payment. However, payday loans should not be your first option if your bank account is low on funds.
Also known as a cash advance, using a payday loan can result in a long term financial ruin. Not only can you end up with a bad credit score, but it can also keep you in a vicious cycle of ongoing debt. You can also acquire online payday loans. Depending on the loan amount, the total cost of borrowing is 75 percent of the loan or higher.
It’s Easy To Become Dependent On Payday Loans
What many people don’t realize is that it is incredibly easy to become dependent on payday loans. These loans are very expensive; for example, you might be charged between $21 to borrow $100, which means you’re paying back $121. However, this is only if you pay back the loan on time. Depending on how much money is borrowed, some individuals need to use their next paycheck in order to pay back the loan, meaning again they are unable to meet basic monthly payments.
As these loans are expensive, it is easy to fall into a position where you depend on them each month in order to pay bills. Because of this, it is imperative that they are taken out only in an emergency, and only if there are no other options available to you.
Payday Loans Have Incredibly High-Interest Rates
As explained above, you don’t just pay back the lender the amount that you borrowed; there is a charge on top of the amount you borrowed. This charge increases steadily if you are unable to pay back this amount within a specified amount of time. Usually, the interest rate will increase every two weeks.
For example, if you are unable to pay back the loan with the 21 percent charge after two weeks, the amount will have an additional 21 percent of interest added to it, and then an additional 21 percent the next two weeks, and so on.
If you are unable to pay back the amount in 4 months, for example, you will be paying for 8 rollovers. Again, because of this it is easy to get trapped under a pile of debt, and only more payday loans can help you meet monthly payments – pushing you further into debt.
Using These Lenders Can Harm Your Credit Rating
Because these loans are so expensive and so difficult to pay off because of the high interest rate, getting into debt is far too easy. As a result, these loans can be extremely detrimental to your credit rating. If these loans pull you into enough debt, you will no longer qualify to receive loans from reputable lenders. Additionally, it becomes more and more unlikely that you’d qualify to receive a loan for a down payment on a house or to finance a car.
It’s important to realize that payday loans are not your only option. There are lots of options out there if you need help meeting payments. First, consider cutting out unnecessary purchases and drawing out a detailed budget.
If this still doesn’t help, speak with your bank about a loan; this will still charge you interest, but at a lower rate than payday loans. Finally, there is no shame in getting a second job or asking family members for some help if you are struggling financially.