Why You Should Avoid Payday Loans


Payday loans have become a lifeline for many cash strapped American families. Payday loans are essentially high-interest, high-risk, short-term loans given largely to sub-prime borrowers who have no other way to get the funds they need so badly.

According to research figures published by the Pew Charitable Trust in 2012, 12 million American adults depended on payday loans in 2010 to make ends meet as the numbers will almost certainly have increased further until 2014.

In 2010, the average borrower took out eight loans per year worth $ 375 each and paid $ 520 in interest.

Payday loan company providers are clearly taking advantage of vulnerable, cash-hungry consumers who need cash fast and are desperate enough to turn to these finance companies.

Source: Wikimedia Commons

While it is widely accepted in American society to take on consumer debt, payday loans should clearly be the last option for people who need a short-term influx of cash.

Payday loans are usually available locally, but they come with the very real danger of being addictive which could lead to a devastating debt spiral. So when you think about taking out a personal loan, you have a better understanding of what you’re getting into.

The dangers of easy money
The popularity of payday loans is largely due to the ease of obtaining them. All you have to do is fill out the application, possibly over the Internet, to accept the loan terms and you get your money pretty quickly.

Unfortunately, the availability of easy money can appeal to consumers and lead them to adopt unhealthy spending habits.

Of course, there may be situations where a short-term cash injection will help you in an emergency, such as paying for a car repair or a medical bill.

However, be aware that payday loans can plunge you into a debt spiral where you have to postpone one payday loan to the next, with little hope of breaking the cycle.

Excessive interest rates
Make sure you understand that payday loans are very short term loans that need to be paid off in full, along with significant interest and fees.

Annualized interest rates (also called annual percentage rates, or APRs) can be as high as a few hundred percent according to information from the Consumer Financial Protection Bureau and it is not uncommon for borrowers to repay a total of interest and fees that exceeds the amount borrowed.

If you take out a payday loan, be prepared to pay 100% or more of your requested loan amount in interest and fees. There is a reason that payday loan companies can be compared to loan sharking.

Payday loans as a last resort
Considering the excessive interest rates and fees charged, payday loans should clearly be avoided at all costs. If you have another chance to fill your cash shortage, use it by all means.

Do not use the personal loan to finance purchases of consumer goods and resist the urge to take advantage of easy credit. You will pay dearly.

The stupid bottom line
Payday loans should be the last resort if you are strapped for cash. You are well advised to exploit all other possible sources of finance first and avoid payday loans like the plague.

The ease of access to quick credit also poses a significant risk of creating short-term debt addiction in which consumers regularly renew their expensive payday loans into new loans.

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