Payday lenders are everywhere; drive past any strip mall in any city and you’re likely to find at least one. These lenders offer short-term loans to potential consumers to help solve their immediate financial issues, and they generally come with high interest rates and a service fee. They can cover gaps in pay periods, and are generally easy to obtain — especially since these payday lenders can be found anywhere. However, before you consider one of these loans, it’s important to understand that they come with a high cost, and it can be hard to get caught up financially once you’ve fallen into its trap.
Here are some of the most common dangers you’ll find with payday loans, and why you should avoid them:
- The odds are certainly not in your favor. These loans are generally for a fixed amount of time — usually between 14 and 30 days. And most people who take out these loans have a hard time repaying them without suffering financially in the end. A review from the Consumer Financial Protection Bureau shows that roughly 80 percent of payday loans are inevitably renewed — meaning that loan is rolled over into a new loan instead of paying it in full. This can lead to a continuous debt cycle, unless you’re able to come up with the funds to fully catch up.
- Collectors might come calling if you don’t pay back on time. In order to get approval for a payday loan, lenders will require proof of income, your checking account information, and your phone number. Not only do they make it easy to receive the loan upon approval via cash or prepaid card, they also make it easy on their end — by making an automatic withdrawal of the owed money on its due date. If you don’t repay this loan or if your checking account bounces, it won’t end there — per state and federal laws, collectors can continue to attempt to withdraw funds from your account, and you may even be sued for nonpayment. Any nonpayment delinquencies can be reported and will severely affect your credit score.
- Prepare to face a high APR. These short-term loans with low borrowing limits tend to inspire payday lenders to slap you with a hefty APR — especially since they’re lending you money without scanning your credit history. Sometimes these APRs can reach up to 400 percent or more, and that’s before you even consider the fees associated with payday lenders.