The Dangers of Payday Loans
Consumers use payday loans to solve financial problems. These short-term loans can bridge the gap between employee pay periods, cover an expense in the absence of an emergency savings account, and even save you from the potential embarrassment of asking parents or in-laws for money. However, this solution comes at a high cost.
Review these common dangers of payday loans, and you might think twice before signing on the dotted line.
High APRs are the norm. A short loan term (between two and four weeks), low borrowing limits (usually $500), and a willingness to lend money without a credit check may lead payday lenders to charge annual percentage rates (APRs) of nearly 400 percent or more. With loan fees that often range from $10 to $30 per $100 borrowed, the cost of borrowing exceeds that of even the highest interest rate credit cards.
The odds are on their side. Payday loans are usually for a period of 14 days. But, the chances of you paying the loan off by the due date is unlikely. A Consumer Financial Protection Bureau review of how consumers use payday loans found that over 80% of payday loans are renewed. This means that instead of paying the loan in full, or as agreed, the loan is rolled over into a new loan. Consumers can quickly find themselves in a continuous debt cycle. High APRs, subsequent loans, and mounting loan fees may put you in a financial whirlwind that’s difficult to escape.
Collection activity is real. Applicants who provide checking account information, can show proof of income, and present a valid phone number should expect a payday loan approval. Lenders make it easy for you to receive loan proceeds via cash, prepaid card, or direct deposit within 24 hours. They also make it easy for the loan to be repaid on their terms by automatically initiating a withdrawal for the balance from your checking account on the due date.
The loan must be repaid. Failure to repay the loan as stated in the loan agreement can result in collection activity which may occur at the same time the payday lender is repeatedly attempting to withdraw funds from your account. As with other creditors, the collection activity may continue as allowed under state and federal law. The payday lender could even sue you for nonpayment. While on-time repayment of a payday loan is unlikely to appear on your credit report, collection agencies can report delinquencies to credit bureaus, which will negatively affect your credit score.
Payday loans often cause more financial problems than they solve. Weigh alternative means to cover pressing expenses or bills. Depending on your cash needs, you may be able to free up funds in your budget by negotiating with creditors to extend a repayment term, temporarily lower an interest rate, or agree to interest-only payments for a limited time.
Need help gaining control of your finances? Certified financial credit counselors may be able to help. The Federal Trade Commission offers guidance on how to choose a reputable credit counseling organization that can help bring stability to your financial situation. Hughes FCU members can also access Money Coach, our free, online video series that can help you become financially fit.