There may be resources available to prevent you from getting bogged down with multiple payday loans. Read on to learn more.
Payday loans are expensive and charge very high fees that must be repaid in a short period of time. In fact, you could end up paying an effective APR that exceeds 400% if you apply for a payday loan.
Despite this disadvantage, many people use payday loans anyway. And there are some valid reasons for this. Sometimes not having the money that a payday loan can provide could have worse consequences than paying the borrowing fee. For example, if a payday loan saved you from eviction or repossession and was your only option, then taking out the loan may have been a good decision.
But while there are certain circumstances where you may justify paying a high fee to borrow through this method, it’s important to note that it’s not the one-time fee that makes payday loans so dangerous. . It is the vicious cycle that forces you to keep borrowing more and more money. Read on to learn more.
The payday debt cycle
The main problem with payday loans is that you have very little time to repay the entire amount owed. In fact, you typically only have a few weeks at most to calculate the full value of the loan. This is a far cry from traditional personal loans, which can pay off over several years.
Unfortunately, if you’ve been forced to apply for a payday loan, chances are you’re already in dire financial straits. Obtaining this type of loan means that you are committing a paycheck in the future to make a large lump sum payment, which is likely to cause you a lot more problems.
Once payday arrives, you may not have the money to cover the full cost of the loan so soon. This is especially true for people who haven’t had much time to recover from the financial crisis that caused them to need the payday loan in the first place.
If you can’t cover the loan, you could end up needing to borrow again and paying a second expensive fee. People who use payday loans generally fall further behind in this way, and the fees add up to a veritable fortune. Even if you can pay off the loan right away, this is likely to eat up a large enough chunk of your paycheck. When that happens, you could soon find yourself out of funds again shortly after, and therefore get another payday loan. Plus, that means paying the high fees a second time, and possibly a third, a fourth, and so on.
Basically the problem comes down to the fact that you are committing future income to cover a current crisis plus a payday loan fee. This increases the likelihood that you will be caught in a continuous cycle of taking on expensive payday debt. That’s why the Consumer Financial Protection Bureau found that most short-term loans ended in a reengagement chain of at least 10 loans.
What can you do to avoid this cycle?
Ideally, you can avoid payday loans so you don’t get caught up in this cycle. You can prepare for that by saving an emergency fund. Your tax refund or stimulus checks could serve as the start of this fund and give you at least some surprise spending money. If you can’t save an emergency fund, look into other options, like alternative payday loans from credit unions. Compared to a payday loan, these come with lower fees and longer payment periods.
But if you have to apply for a payday loan, do your best to avoid borrowing again, even if you need to do secondary work or cut expenses before the payment is due. In this way, you can avoid getting into more debt.
You can also look for government resources that could help you deal with a financial crisis. And if you are in a loan renewal cycle, know that you are not alone – you are one of many caught in a vicious cycle. For more resources and ideas to help you avoid payday loans, check out our guide on how to pay off your debts.