Risk of Payday Loans
Payday loans are easily available with a simple online application. Many find themselves in
a situation where they need money fast. More than forty percent of millennials have used
payday loans to detail with debt and pay immediate expenses when they don’t have the
cash at hand.
What is a Payday Loan?
A payday loan is a short term loan, usually a few weeks, that comes with a very high
interest rate. They are designed to be repaid quickly. The purpose of the loan is to give
people the short term solution they need when they need to pay for something urgently,
such as a car repair.
They are very easy to access with many lenders not even requiring the borrower to pass a
credit check. You receive approval within minutes and the cash is transferred to your bank
account. The problem is that you need to be in a financial situation on your next pay date
to repay the loan.
It is important to be aware of the risk of payday loans before you sign. There are a number
of risks associated with this short term loan product.
Risk 1 – Payday Loans create a cycle of debt
When you find yourself with limited cash, a payday loan is able to assist temporarily, but
you are setting yourself up for further debt. More than half of payday loans are extended
with many people taking out eleven loans each year. This is due to many not being in a
position to repay the loan when it is due, consolidating their borrowed funds in new loans,
which in turn creates a cycle of debt, which is not easy to get out of.
Risk 2 – High Fees
Payday loans come with very high interest rates. This means when the loan is due for
repayment, you have to pay the full amount borrowed plus interest. The APR is calculated
annually and applied for the length of time you take the payday loan. These short term
loans mean you could find yourself owing as much in fees as you borrowed in the first
Risk 3 – You Get Deeper in Debt with Rollovers
When it’s time to repay your payday loan, if you cannot afford the full amount, many
lenders will allow you to pay the initial fee to extend the due date. This means more fees
being added to the amount you already owe. This means that before you realise it, you
owe more in fees than you originally borrowed, which pushes you even further into debt.
Risk 4 – Expect Collection Calls
Due to the fact that payday loans are expensive and the risk of not being able to repay the
loan is high, you could find yourself facing numerous calls from debt collection agencies. If
you are at work, trying to make the money to repay the loan and you are faced with
ongoing collection calls, it can be very frustrating. You should only consider a payday loan
if you are confident in repaying it on the date it is due.
Risk 5 – They are not long term loan solutions
Payday loans are designed to be short term loans of only a few weeks. They are not
suitable as a long term loan solution or for larger financial needs. You cannot use a
payday loan to make your way out of debt, assisting with major expenses.
In conclusion. Taking out a payday loan should be done with care and consideration. Take
the total value of the amount borrowed plus interest and ensure you can fit it into your next
payday budget to reduce the risk of finding yourself even deeper in debt in the long run.