Risks of Payday Loans
The payday loan has been around for a while. It was designed to give people the funds they need to get through until their next payday without having to submit to a credit check.
Generally, people with any credit rating can get a payday loan. All they need is a job and a checking account in good standing. There is a large interest rate added to amount borrowed, but a borrower can get their cash without having to meet too many requirements. Typically, the lender will automatically debit the principal and interest from the borrower’s checking account on their next payday.
While this sounds easy, it is important to be aware of the risks because they do exist. It is convenient to take on a quick loan, but it can be inconvenient when it’s time to pay the money back and there are other expenses to be paid. This can result in the need of another loan to get to the next payday.
Why People Are in Debt and How to Avoid It
Everyone goes into debt in some form, and it’s often to pay for large, expensive items like a car or a house. When other lines of credit, like personal loans and credit cards, are added to the debt pool, they can make it overwhelming. This is when they can ruin their credit by lacking the income or responsibility to repay the money they borrowed. But if their credit is already damaged or they don’t want to miss a payment and risk damaging it, they may turn to payday loans for quick cash that will help them pay their bills.
Some people can handle payday loans just fine: They borrow only what they need and nothing more. That said, some may borrow too much, which makes it hard to pay back the money on the following payday while still paying their daily living expenses. The latter group puts themselves at risk of falling deep into the payday loan cycle, which is hard to get out of.
Another issue with payday loans is the short repayment period. Although it may seem great to pay off a loan in just one pay period, this short repayment window can put you in a financial pinch. One financial misstep can cause a domino effect, and tossing a payday loan into the mix can cause those dominos to fall in too many directions to catch.
What Happens When You Can’t Repay the Loan?
If you can’t repay the loan as agreed, you may have to deal with an administration fee, late fee and higher interest. It is possible to contact the lender before the payment is late to work out a solution, and some payday lenders will extend the repayment period. This does, however, result in more fees and interest. If you still have trouble paying back the loan, the payday loan company may turn the account over to a collection agency, which will damage your credit and result in more fees.