Payday loans are often advertised as a last resort for individuals in desperate financial circumstances who are faced with the need for immediate cash to stay afloat.
But while they may be fronting the neon storefronts boasting tempting offers for quick cash, in reality payday loans are a huge financial danger that could push you into an endless cycle. What’s more, that danger is present for anyone – no matter your economic background. A recent article by Time points to the fact that payday borrowing isn’t just limited to those making a lower wage. When hit with financial hardship, individuals from all economic backgrounds can fall victim to payday loans and face the consequence of large payback fees. It’s not by accident, either. Payday lending companies are looking to profit from the needs of any potential borrowers.
The truth is, people from all financial backgrounds can struggle at times to maintain their finances. And when there seems to be no other solution, quick loans may seem to be the only option. Unfortunately, these loans come at interest rates which are so high that they only prolong the financial struggle. If you find yourself financially pressured, don’t fall prey to the temptation of payday loans that will add more weight to your financial burden.
Things To Watch Out For
Astronomical Interest Rates and Quick Payback Periods
One of the main reasons why payday loans are particularly dangerous for financially vulnerable individuals is the unrealistic terms set out for the loan. Interest rates will usually be incredibly high (some double or triple a credit card interest rate) and the repayment period will be short. The standard is usually 2 weeks. Yes, payday loans mean quick cash but they require quick repayment. The timeline can often be unrealistic for people who truly are struggling financially. If you’re living paycheck to paycheck (which can happen to people of all economic levels), then odds are you won’t have the money necessary to pay back the loan in two weeks. Beginning what could very well be a vicious financial cycle.
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Payday loans offered via online service can be particularly dangerous. Without the face to face interaction you have no way to verify the legitimacy of the business. Many online payday lenders fall into the category of scammers and can pose a serious threat to your finances. They may be phishing to obtain personal information in order to steal the identity of an application or gathering contact info to sell to other companies for profit. Major red flags should be raised if you aren’t able to find contact information on the site or any sort of online validation for their credibility.
Payday lenders know that potential borrowers are in a tight financial situation and do what they can to use that to their advantage. That means predatory practices such as manipulative advertising promising a quick fix to your financial needs. They’re more likely focused on pulling your heartstrings as a way to your purse strings. Be aware of the language used, promises made, or “special deals” offered.
Differing State Regulations
Not all states treat payday lending in the same way. States with lax regulations generally have higher occurrences of scam type lending, higher lending limits, and increased interest rates. Without protections against unfair lending practices the terms can reach unreasonable heights. For those of you living in states with fewer regulatory limitations it may be easier to obtain a payday loan but also much riskier by consequence. Take a look at your state and see where it stands on the topic of payday loans in order to understand just how risky it may be.
So if the risks are so high, why would anyone take out a payday loan?
The reasons for taking out a payday loan can vary, though the majority of people commonly cite financial hardship as the main spur. Since payday loans are available in smaller sums than most traditional bank loans, the loan falls into the category of “quick fix” for expenses that need immediate financial attention. Late rent, for example or an unexpected emergency. Same-day cash promises can be particularly tempting when paired with financial stress.
What can you do if you feel like an immediate boost to your finances is the only way to stay afloat?
First and foremost, it’s important to look at the financial consequences of a payday loan. With interest rates that can reach as high as 400% APR you’ll be paying significantly more on the loan than the principal you take out and driving up your debt long term. It’s imperative to understand the financial hit that can result from payday borrowing.
There are plenty of alternatives to payday loans to consider. Most are much more preferable than the high interest rates of payday loans. Though you may feel that there’s no other option, view these alternatives and see if one might work for you.
Trust your intuition! Payday loans seem too good to be true because they are too good to be true. Watch for the red flags of quick lending and research your alternatives as a way to avoid entering into any contracts with payday lenders.
Image Credit Tom Magliery