Home Fico score This is the main reason why payday loans are so dangerous

This is the main reason why payday loans are so dangerous

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Payday loans are expensive and come with very high fees that need to be repaid in a short period of time. In fact, you could end up paying an effective APR of over 400% if you take out a payday loan.

Despite this drawback, many people still use payday loans. And there are valid reasons for that. Occasionally, do not having the money that a payday loan can provide could have worse consequences than paying the loan costs. For example, if a payday loan saved you from eviction or repossession of your vehicle and that was your only option, then taking out the loan might have been a good decision.

But while there are some circumstances where you can justify paying high fees to borrow through this method, it’s important to keep in mind that it’s not the one-time fees that make payday loans so dangerous. It’s the vicious cycle that forces you to borrow more and more money. Keep reading to learn more.

The Payday Debt Cycle

The major problem with payday loans is that you have very little time to repay the entire amount you owe. In fact, you usually only have a few weeks at most to determine the total value of the loan. This is a far cry from traditional personal loans, which you can repay over several years.

Unfortunately, if you’ve been forced into taking out a payday loan, chances are you’re already financially stretched thin. Taking out this type of loan means you’re committing a future paycheck to making a large lump sum payment, which could land you in a whole lot more trouble.

Once payday arrives, you may not have enough money to cover the full cost of the loan so soon. This is especially true for people who haven’t had much time to catch up with the financial crisis that caused them to need the payday loan in the first place.

If you cannot cover the loan, you may have to borrow again and pay a second expensive fees. People who use payday loans usually keep falling further and further behind in this way, with the fees adding up to a veritable fortune.

Even if you can paying off the loan immediately will likely eat up a good chunk of your check. When this happens, you could soon find yourself out of funds soon after and thus take out another payday loan. Plus, it means paying the hefty fees a second time – and possibly a third, fourth, etc.

Basically, the problem comes down to the fact that you are incurring future income to cover a current crisis plus payday loan fees. This increases the likelihood that you will be trapped in a continuous cycle of costly payday debt. That’s why the Consumer Financial Protection Bureau found that most short-term loans ended in a reborrowing chain of at least ten loans.

What can you do to avoid this cycle?

Ideally, you can avoid payday loans so you don’t get trapped in this cycle. You can prepare for this by saving an emergency fund. Your tax refund or stimulus checks could serve as a starting point for this fund and give you at least some cash for surprise expenses.

If you can not save an emergency fund, then consider other options such as alternative payday loans from credit unions. Compared to a payday loan, these come with lower fees and longer repayment periods.

But if you need to take out a payday loan, do everything you can to avoid borrowing again, even if you have to work on the sidelines or reduce your expenses before the repayment is due. This way you can avoid going into further debt.

You can also consult government resources that could help you deal with a financial crisis. And if you find yourself in a reborrowing cycle, know that you’re not alone – you’re one of many trapped in a vicious circle. For more resources and ideas to help you avoid payday loans, check out our guide on how to pay off your debt.

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