Payday loans are quite expensive as compared to other loans. They must be repaid within a short period and charge high fees. If you get a payday loan, you will be paying an effective APR of more than 400%.
Many people still prefer payday loans despite knowing the disadvantages, and they have solid reasons for it. In some cases, not having money can have dire consequences, thus making it better to take a payday loan and paying the fees. For instance, if taking out a payday loan can give you repossession of your vehicle while you don’t have any other option, it is the right move.
However, a payday loan is a justified method for only a few circumstances, paying a high fee to the lender. It is not ideal for every situation. Moreover, it is also crucial to understand that it isn’t a one-time fee that makes payday loans risky. It is the never-ending cycle that makes you borrow again and again.
The Cycle of Payday Loan
The key problem with payday debt is the short time you have to pay the full amount you owe. Usually, you have a couple of weeks to pay the entire loan. It is quite different from personal loans, where you have multiple years to pay your entire loan.
If you don’t have any other option except a payday loan, it means you are already constrained financially. Getting a payday loan means all your future paychecks go to the lender, causing more problems for you.
You may not have the money to pay the full loan on the due date of the payday loan. A payday is an option for those who have an immediate need for cash. If financial constraints forced them to get a payday loan, they wouldn’t have enough time to recover from their crisis within a couple of weeks.
Hence, if you fail to repay the loan, you pay the expensive loan fee again. Once people take up a payday loan, they keep sinking deeper and deeper in debt, along with the loan fees adding to a real fortune. On the contrary, if you successfully repay the full loan, it will take up a large amount of your paycheck. Ultimately, you will find yourself short of funds again. Thus you will again take another payday loan paying the loan fees the second time and, if needed, the third, fourth, and so on.
Essentially, the problem lies in the fact that all your future paychecks will cover the current loan and payday loan fee. It increases the probability of being trapped in the never-ending cycle of payday debt. According to the Consumer Financial Protection Bureau, one short-term loan usually ends up in a chain of at least ten reborrowings.
How Can You Avoid This Cycle?
You must evade payday loans to avoid being trapped in the perpetual cycle. You should have an emergency fund saved up for such situations. Also, you can save these funds through your tax refunds and incentive checks if any unplanned expense comes up.
Other than emergency funds, you can also look for other options available such as payday alternative loans by credit unions. As compared to payday debt, it has a longer repayment period and is given at a lower fee.
In case you need to take up a payday loan, avoid reborrowing at any cost, even if you have to cut back an expense or take a side job; this way, you can avoid reborrowing the loan.
Also, look into the government’s resources that might aid you in coping up with financial constraints, and in case you find yourself trapped in the reborrowing cycle, remember you aren’t alone. There are many people trapped in this malicious cycle. But try to look for the resources mentioned above that might help you get out of it.
