Payday loan. You know they are bad. And if you don’t, we have information for you: Payday loans are bad. How dangerous, catastrophic, how-these-even-legal are bad.

From high-interest rates to short-term and deceptive practices, there are many reasons why it is better to avoid payday loans.

But what makes these theft loans the worst of the worst? A little thing called the payday debt cycle.

What are Payday Loans?

A payday loan is another form of short-term loan that can also be accessed quickly by people with bad credit, with little or no income. Given the increased risk that these loans present to the lender of people who generally have bad credit and are unsecured, they generally have higher interest rates and interest rates than you can find on other types of loans, such as B. Personal loans and credit cards. And it’s not just interest and fees that you have to take into account, as Hutchison notes: “They’re meant to help those in need or between paydays, so repayment terms are often longer. in short, from two weeks to a month and sometimes extended to six months. “

Why do people use payday loans?

People tend to look for payday loans if their credit scores are too low to qualify for a traditional loan from a bank or credit union. Applying for many types of loans can also further affect your creditworthiness. John Ganotis, the founder of Credit Card Insider, explains: “A credit check by a lender leads to a so-called difficult investigation. Thorough advice is normally part of the credit process and is stored in your credit reports for two years. 

Since payday lenders do not perform credit checks, many potential borrowers who need a loan consider payday lenders as their only option to avoid a credit check that could further damage their credit. A better option might be to find a lender who will do a “flexible credit check” that does not affect your credit rating. But we are not talking about what happens to the best option. We are talking about payday loans.

How are borrowers caught with payday loans?

OK, let’s say you took out a payday loan (maybe you didn’t know how dangerous they were or didn’t think you had other options). The interest rate is astronomically high (350%) and the terms are very, very short (two weeks). So what happens in the likely event that you cannot pay the borrowed money (plus all of that interest) on time?

You have to pay expensive “reinvestment” fees to extend the loan. These are costs that you will likely not be able to afford even before you start calculating the additional interest that will result from the extension. It is not difficult to see how you may need to renew the loan again. And even. As debt builds up and your credit rating goes down. That’s it The dreaded debt cycle on payday loans. You keep paying. Interest continues to grow. And suddenly this “two-week loan” takes months and months.

Financial writer Jen Smith told us that the debt cycle is different for every family. Sometimes it is obvious to everyone that the debt has been misused, but in most cases, the debt accumulates and is gradually ignored until it accumulates to the point that people feel foreclosed, bankrupt, or worse, are their only options. “

Can You Escape the Loan Debt Cycle?

Jen Smith said that Education is the key to getting out of debt. It is imperative that we teach children and young people with a reasonable understanding of money. Many will say that children should learn their personal finances at home or not listen to them. These reasons are not sufficient to distance financial education from schools. Ideally, each class level has an age-appropriate curriculum on the subject of money. And more online content on financial literacy, where adults spend the most time, is relevant and refers to low-income people to help adults.