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Why payday loans are dangerous

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Why payday loans are dangerous

It’s hard to find yourself in a situation where you need the cash right away, but you are not alone. In fact, 42% of millennials have used methods such as payday loans to settle their debts, according to a study by the Global Financial Literacy Excellence Center at George Washington University.

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So what is a payday loan? The Consumer Financial Protection Bureau defines a payday loan as a short-term, high-interest loan without a credit check, which typically does not exceed $ 500. Payday loans can be obtained online or through physical locations. When you don’t have a financial cushion in place and you need the cash quickly, a payday advance might seem like a good solution. But using a payday loan to get out of debt could be a costly mistake.

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Learn about payday loans and why they might not be the best way to get out of debt.

Last updated: July 7, 2021

payday-loan-sign
payday-loan-sign

5 reasons to avoid payday loans

Payday loans can be tempting when you have limited financial resources, but consider the dangers of payday loans before signing on the dotted line. Read on to see five disadvantages of payday loans.

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people-finance-concept-client-pen-paper
people-finance-concept-client-pen-paper

1. They create a cycle of debt

When your financial resources are almost depleted, getting a payday loan can help you temporarily. But at the end of the day, all you do is position yourself to take on more debt.

About 75% of payday loans go to people who take out 11 or more loans per year, according to CFPB data. Unfortunately, many people cannot repay their payday loans when due, so they consolidate the borrowed funds into a new loan and create a cycle of debt.

Check: The 8 best payday advance apps to close a cash gap

three-twenty-dollar-sixty-dollar bills
three-twenty-dollar-sixty-dollar bills

2. High fees apply

Credit card APRs are typically between 12% and 30%. The average two-week payday loan, however, has a fee of $ 15 for every $ 100 borrowed – an APR that equates to nearly 400% per loan, according to the CFPB.

A short-term payday loan of $ 400, for example, could cost you $ 60 in fees. And if you extend the loan long enough, you could end up owing as much in fee as you originally borrowed.

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businessman-giving-money-us-dollar-bills
businessman-giving-money-us-dollar-bills

3. Rollovers allow you to get deeper into debt

When a payday loan is due and you cannot pay the full amount, some lenders will allow you to pay the upfront fee only to extend the due date. But, then another charge for the same amount is added to the principal.

For example, if you borrowed $ 200, with a charge of $ 15 for every $ 100 borrowed, you will owe $ 230 on your next payday. On your next payday, if you choose to pay the $ 30 fee to extend the loan, the lender will add an additional $ 30 fee and so on. Before you know it, you could be paying almost $ 100 in fees without reducing principal.

businessman-office-talking-on-the-phone
businessman-office-talking-on-the-phone

4. They come with the potential for repeat fundraising calls

Since these high-risk loans are also expensive, you might not be able to repay your loan on time, which could lead to repeated calls from debt collectors. The Fair Debt Collection Practices Act states that a debt collector, such as an online payday loan representative, is not allowed to repeatedly contact you with the intent to annoy you, abuse you, or harm you. harass you. Also, debt collectors are only supposed to call within the hours of 8am to 9pm.

repairman-roof-replacement-yellow-gloves
repairman-roof-replacement-yellow-gloves

5. They are not a solution for big financial problems

According to the CFPB, payday or online loans are generally capped at $ 500. So don’t expect this type of loan to help you get out of debt for good or face major expenses like replacing a roof. According to Fixer.com, a DIY services site, the national average for the cost of a roof replacement is over $ 6,000.

young-african-pouring-milk-in-the-cafe
young-african-pouring-milk-in-the-cafe

Alternatives to payday loans

With a little research you can find other potential options to generate money quickly without high fees. Take a look at these payday loan alternatives.

donation-of-the-hand-money-dollars-united-states
donation-of-the-hand-money-dollars-united-states

1. Borrow from a trusted friend or family member

While it can be awkward, humbly approach a friend or family member you trust and explain why you need to borrow money. Offer to have a specific but realistic written payment plan to show that you intend to repay the loan. Even if the person wants interest on loaning you the money, it probably won’t be something like you would with a payday loan.

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professional-taxi-driver-taxi-driver
professional-taxi-driver-taxi-driver

2. Get a side job that offers immediate payment

Do not underestimate the income potential of a good side activity; opportunities with immediate payment are available. These examples include, but are not limited to:

Lyft or Uber: Drive your car, as an alternative to a taxi service, and get immediate payout with just $ 50 earned. You might have to pay a 50 cent instant payment fee to get your money back, but it’s your money, not the money you have to pay back.

Uber eats: Forget about dealing with passengers and instead deliver food as a side work or weekend work. Apply with Uber Eats, a delivery service for people who want food from their favorite restaurants delivered right to their door.

Craigslist Ads: Search concert listings to find jobs that pay quickly. You might find opportunities to help people prepare their luggage for a move, driving jobs, cleaning jobs, or babysitting opportunities.

saleswoman-talks-couple-happy-customers
saleswoman-talks-couple-happy-customers

3. Seek credit counseling

Having a qualified professional who knows the ins and outs of debt management can prove to be beneficial. Contact a reputable service, such as the National Foundation for Credit Counseling, and speak with a credit counselor who can help you create a realistic and personalized budget as part of a debt relief plan.

young-african-woman-sitting-alone
young-african-woman-sitting-alone

Find other ways to pay off your debt

Payday loans can be extremely dangerous to your financial health, especially if you are already struggling with debt. With the high fees charged by payday lenders and the ability to extend loans more than once, you can easily find yourself in a cycle of debt, a target of collection efforts, or both.

Take other steps to pay off debts right away, like borrowing from a friend or family member or getting a side job that pays off quickly. Next, consider contacting a credit counselor to help you get out of debt for good.

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This article originally appeared on GOBankingRates.com: Why payday loans are dangerous

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