Four Reasons Why Payday Loans Are Risky
We’ve all been there — living from paycheck to paycheck, money just being enough to pay off your bills, not being able to afford car insurance. So, if you feel like such a financial failure, don’t be. Most of us have been (or might even still be) exactly where you are now — struggling with finances and thinking about taking out a loan.
A loan is like the devil’s cake. You know it isn’t good for you, but you can’t help yourself because it’s sinfully good. It seems to be a quick fix and an easy solution. It’s available everywhere and comes in many forms, the most popular of which is payday loans. When it comes to this kind of loan, there are a number of risks involved that you have to know before you should take one. Knowing the risks that come with it will help you make a smart decision. So what are these risks and should you really be concerned with them?
High Interest Rates
This is one of its biggest risks. They are going to offer you a low interest rate to entice you to get one, but there is actually a catch (and a huge one at that!). An interest rate that low usually comes with the stipulation of you getting a certain amount. And the fact is, the interest rate will vary according to the amount of money that you will borrow.
So if you think about it, the interest rates are actually expensive. With a credit card, you get an interest rate of about 28% to 36%. How will an interest rate that is about ten times higher than that would make you feel? That is usually how expensive this type of loan is.
Cycle of Borrow-Pay-Borrow
Although there are some lenders who prevent you from becoming a habitual borrower by maintaining a strict database, there are some lenders that would leave you stuck in a payday loan cycle (more money for them after all). In fact, according to a research, a whopping 76% of payday loans are made to pay an existing payday loan and that even though most of this kind of loans are meant to be paid over a period of two weeks, a borrower can stay in debt for more than 6 months (that’s probably longer than the time most of us spent on our first relationship!).
Debt Grows Bigger and Faster
Because of the high interest rates and the option set that you can roll over a payment, you can end up paying about three, four, or even ten times the amount of money that was originally lent to you. A debt that is made through a payday loan often quadruples within just a year, and this kind of loan can bring you a lifelong debt (think imprisonment, only for your wallet).
Too Available and Easy
While other types of loans require serious paperwork and thorough deliberation for an application to be approved, a payday loan, on the other hand, can be easily available (you can probably get one on your lunch break). And if you think about it, they are actually designed in a clever way: giving borrowers little time to think the deal over. A payday loan also carries no right to rescission. This means if you change your mind even just right after you sign the papers, too bad because you can no longer back out. Know the saying, “Nothing worth having comes easy”? Whoever said that must have taken out a payday loan and regretted it.
We all find ourselves in a bind, and sometimes, we can’t help but take out a loan. And for the average-income employed individual, loans are a big part of our lives. And most of the time, they really do help us in times of need. However, keep in mind that there are good lenders and bad lenders, and it’s up to you to choose wisely. Do a thorough research first — whether that’s through online articles, a financial advisor, or friends and family members who have experience availing payday loans. It may seem time-consuming and tedious, but it’s worth the effort, especially since your finances are involved! Never take it for granted and assess everything carefully before making a final decision.
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