Payday loans are advertised as a way for those strapped for cash to obtain money for minor financial emergencies. Typically, the only requirements for obtaining the loan are having a job with a steady paycheck and having a bank account. The money is loaned out in exchange for a post-dated check for two weeks later, the typical interval in which an employee gets paid. Unfortunately, instead of helping people out of difficult financial positions, these loans often cause people to go deeper into debt in a vicious cycle of obtaining and repaying the loans. Here are some of the most common problems encountered when taking out payday loans.
The Loans Have Extremely High Interest Rates
Payday loans have some of the highest interest rates of any type of financial product offered to consumers today. In many cases, the loans have been found to exceed 300% APR, where as credit card interest rates rarely go higher than 25% APR. The extreme nature of the interest rate is somewhat hidden by the short repayment time and the interest charge is often rolled into a “fee” for obtaining the loan. When the interest rate for a payday loan is calculated the same way as an interest rate for a personal loan or a credit card, the discrepancies between the amount of interest charged for the same amount for the same amount of time is staggering.
The Loans Have Extremely Short Repayment Windows
Most payday loans must be repaid within 14 days of the loan being issued and it can be very difficult for a borrower to come up with enough additional money to pay off the loan in addition to their other financial obligations within that time period. In many cases, the borrower ends up taking out an additional payday loan to cover the original loan and the associated fees so that they can also pay all of their other bills. This can create a vicious cycle of debt that can continue to build on itself for months before it is eventually paid off for good.
The Loans Often Must Be Rolled Over
If you are unable to make the payment on time without significant financial hardship, many payday loan lenders offer the option to roll the loan over for an additional two week period for an additional fee. This can be dangerous as you pay much more in interest charges and fees when you roll the loan over from week to week over and over. The money that you are paying to the loan company in interest is money you are not saving for your own future financial needs, putting you at greater risk of needing to take out additional high interest loans in the future.
While taking out a payday loan may seem like the best option when you are desperately seeking a solution to a financial emergency, nearly every other option that may be available to you, including borrowing from loved ones and seeking emergency assistance programs, will be better for you financially in the long run.