Happy Long WeekendPayday lenders seem to be everywhere. From busy city streets to neighborhood strip malls, these businesses promise fast cash and quick approval when money is tight. While payday loans may appear to offer a short-term solution to an immediate financial need, they often come with serious risks that can create long-term financial stress.
At Polam FCU, our goal is to help members make informed financial decisions and avoid products that can cause more harm than help. Before considering a payday loan, it is important to understand how they work and why they can be so costly.
What Is a Payday Loan?
A payday loan is a short-term loan, typically due within 14 to 30 days, designed to cover expenses until your next paycheck. These loans are usually easy to obtain and require minimal documentation, often just proof of income, a checking account, and contact information. Funds may be provided in cash, deposited directly into your account, or loaded onto a prepaid card.
While the convenience may be appealing, this ease of access often masks the true cost of borrowing.
The Debt Cycle Risk
One of the biggest dangers of payday loans is how difficult they are to repay on time. Because repayment is due quickly and often in a lump sum, many borrowers find themselves unable to pay the full amount when it comes due.
Studies have shown that a large majority of payday loans are renewed or rolled over into a new loan rather than paid off in full. Each renewal typically includes additional fees, increasing the total amount owed and trapping borrowers in a cycle of debt that can be hard to escape.
Automatic Withdrawals and Collections
Payday lenders usually require access to your checking account as part of the loan agreement. On the due date, they automatically withdraw the full loan amount plus fees.
If there are insufficient funds in your account, you may face overdraft fees from your bank in addition to penalties from the lender. In some cases, lenders may continue attempting withdrawals, send the account to collections, or pursue legal action for nonpayment. These actions can cause significant financial strain and damage your credit history.
Extremely High Interest Rates
Payday loans are known for their exceptionally high annual percentage rates (APR). While the loan term is short, the fees translate into APRs that can reach several hundred percent. In some cases, APRs can exceed 400%.
Because payday lenders often do not review credit history, they offset their risk by charging excessive interest and fees. Over time, these costs can far exceed the original loan amount.
We’re Here to Help
At Polam Federal Credit Union, your financial health matters. If you are considering a payday loan or already feeling overwhelmed by high-interest debt, reach out to us. Together, we can review your situation and find solutions designed to help you move forward with confidence.
Contact Polam FCU today to learn more about safer borrowing options and resources available to you.