“Debt is the slavery of the free.”
When you need quick cash for an emergency or for a weekend treat before your next pay, a payday loan may look like the best option. You can apply in minutes online or in the store. But with interest rates sometimes as high as almost 800%, payday loans are probably the most dangerous loans to take.
Cash Money, Money Mart, Cash 4 You and many others have aggressive advertising campaigns in various neighborhoods screaming for people to just walk in and take a payday loan. And immigrants often get hooked.
Avoid payday loans for these reasons:
5 dangers of Payday Loans
- They create a vicious debt cycle
When your financial resources are near depletion, getting a payday cash loan might help temporarily. But ultimately, all you’re doing is positioning yourself to sink further into debt.
Approximately 75% of payday loans are extended to people who take almost 12 loans per year. Unfortunately, many people can’t pay off their payday loans when due, so they consolidate the borrowed funds into a new loan and create a cycle of debt.
- Outrageous interest rates
Credit card APRs typically fall between 12% and 30%. The average two-week payday loan, however, has a fee of $15 per $100 borrowed — an APR that equates to almost 400% interest rate per loan.
When the loan is extended, the rates can climb up to 800% or more.
Why should anyone venture into payday loans? “Interest on debts grow without rain.”— Yiddish Proverb
- Rollovers gets you into a deeper debt hole
When a payday loan comes due and you can’t pay the full amount, some lenders will allow you to pay the initial fee only to extend the due date. But, then another fee for the same amount is tacked on to the principal.
For example, if you borrowed $200, with a fee of $15 per $100 borrowed, you’d owe $230 on your next payday. On your next payday, if you opt to pay the $30 fee to extend the loan, the lender will tack on an additional $30 fee and so on. Before you know it, you could be paying close to $100 in fees without reducing the principal.
- Get ready for debt collectors
Because these high-risk loans are also expensive, you might not be able to pay off your loan in a timely manner, which could result in repeated calls from debt collectors.
Most regions specify that a debt collector, such as a payday loans online representative, is not allowed to contact you repeatedly with the intent to annoy, abuse or harass you. Additionally, debt collectors are only supposed to call within the hours of 8 a.m. and 9 p.m.
But this is not always the case. If you are owing a payday loan, the debt collections calls never stop.
- It’s a fool’s paradise
Payday storefront or online loans are for short-term needs and will not help you climb out of debt permanently or help you with major expenses, such as roof replacement or major renovation.
A payday loan is only a temporary fix for a long-term financial problem. It brings you no financial freedom.
“Debt is the worst poverty.”
Rather than going for payday loans, take other actions to resolve immediate debts, such as borrowing from a friend or family member or obtaining a side job that has a quick payout. Then consider contacting a credit counselor to help you work your way out of debt permanently. And above all, aim for financial discipline.