According to Market Watch, most Americans live from paycheck to paycheck. If an emergency occurs, such as an accident or a critical health issue, they have no savings to cater for it. This tendency has given life to payday loan lenders because they provide quick cash that is easy to apply.
But what is a payday loan, and why is it not the best option?
We will shed more light on payday loans and why they are not your best option.
What is a payday loan?
A payday loan is a short-term cash advance that you can borrow from a store or an online app to repay when your next paycheck arrives. Most people take them for emergencies, but recent studies have shown that some Americans pay their daily utilities and bills with payday loans.
Payday loan lenders offer quick and easy loans, seeing they don’t look at your credit score or other debts. They are only concerned about your employment status and whether you are capable of repaying the loan.
Normally, when you take a payday loan, the lender will require you to write a post-dated check to pay them from your next wage or salary. Similarly, some lenders use electronic methods to deduct money from your bank account as soon as some cash comes in. The repayment amount is the loan amount, application fee, plus the interest accrued.
Why is a payday loan not the best option?
Payday loans offer quick financial solutions when you are in a fix. They are beneficial to individuals with bad credit, no credit, or who can’t access traditional loans from banks and credit unions. However, these loans can be an expensive financial trap that may take you months or years to break free.
The following reasons make payday loans bad:
Payday loans are generally between $100 and $500 in most states. Most lenders will charge $15 for every $100 borrowed. For instance, if you borrow $300, you will pay back $345.The interest rate is ridiculously high, going up to 600% annual percentage rate (APR) in some states.
This interest rate is exceptionally high compared to traditional loans such as banks, credit unions, and credit card companies. Typically, conventional loans will charge up to 16% APR.
Inadequate payment period
The short-term nature of payday loans makes it hard for you to repay the debt in the agreed time. Most payday loans mature between two weeks and one month. This time is not enough for you to gather enough money to repay the loan together with the high-interest rates and fees.
What happens is that you will fail to meet the deadline, and the lender will apply a penalty, rollover the loan and apply additional fees. Sometimes, you may end up paying double the initial amount.
Due to the high-interest rates and short repayment period, you will likely lack enough funds to settle the debt. To avoid penalties or mistreatment by collection agencies, most borrowers will renew the loan. When you renew the loan, the lender applies rollover fees and adds a new fee.
As you live from paycheck to paycheck and at the same time struggle to settle the accruing debt, you find yourself in a loophole of debts. This cycle of debt can mess with your financial situation and also affect your mental health.
What’s The Solution?
Payday loan consolidation is a way to help you pay off your payday loans. You can consolidate all of your outstanding loans into one new loan that will have a lower interest rate and monthly payment. Payday loan consolidation combines all your debt into one monthly payment with a lower interest rate and better terms. For many borrowers, this helps them get back on their feet quickly without having to worry about paying off multiple debts at once. Consolidating your debt with a single lender also simplifies things for you because it will cut down on paperwork and give you just one bill each month instead of several different ones from various lenders that have been combined into what’s called a “debt pool.
Payday loans are short term monetary solutions that can be helpful during emergencies. They are easy to apply, only require you to be employed and have a bank account. However, as much as they are easy to secure, they have exorbitant interest rates and application fees.
Additionally, their shirt repayment period makes it hard to honour your debt due date, promoting the lender to rollover the loan. The additional rollover fees and the new loan can trap you into a never-ending debt cycle.