Pitfalls of Payday Loans

Payday loans are a very commonly used financial tool. Almost anyone can qualify to obtain a cash advance loan. These short term loans are used for sudden emergencies that will not fit into the regular budget, such as car repairs or emergency medical bills that must be paid immediately. They are available to almost anyone with income and a bank account, but the interest rate charged for these loans is very high. Another common reason some people take out a quick cash loan is to avoid an even higher fee from a late credit card payment or bank insufficient funds check charge. Fast cash loans are designed for short term occasional use, but many persons get trapped in the pitfalls of payday loans.

Avoid Getting Trapped in High Interest Payday Loans

There are several pitfalls to beware of when using payday loans. Being unable to repay loans on time is one big pitfall. The problem here is that the borrower usually cannot repay the loans they have out at one time when due. To solve that problem, they borrow for another period. This continues until loans are finally repaid, but the high interest fees can really mount up over time. These loans are usually due in 8 to 30 days, whenever the borrower is paid. Revolving that loan for a few times can really skyrocket the amount of interest paid on the original amount.

Short term cash advance lenders are not bound by government regulations with regard to the amount of interest they can charge. Banks are restricted to around 36%, but these payday loans can carry interest APR rates as high as the market will bear. Most begin around 396% APR, but some can be as high as 2000% or more. A typical fee for borrowing $100 is between $15 and $25. This amount is added to the borrowed amount every time the loan recycles. If you borrow $100 one time, plus the $25 fee, you will owe $125. If you cannot afford to repay all that on the due date, you may again borrow that original $100 and then owe another $25 fee.

Repayment Problems

Most lenders require you to repay the entire amount due before you can get another loan. If you do not have enough money to pay off your payday loan, you might immediately borrow a higher amount to cover everything, say $140. This will then have another higher fee of $35 on top of that, for a total due next time of $175. Or, you might borrow less, say $80, but this also will have another interest fee of about $20 added to it. Some people keep reducing their loan amount each time to get out of it at some point in the future. Payday lenders may also offer a “payment plan” to do the reduction over time. If you do a payment plan, you may discover you are denied another cash advance loan in the future.

Some lenders will allow you to “roll” the loan without repaying anything that day. You can keep it out until the next pay period, but they will still add on a second fee amount. Renewing a cash advance loan every payday can quickly add up to double, triple or more times the original amount borrowed. This is a big payday loan “trap” to be avoided.

Too Many Payday Loans

Another pitfall of payday loans is having too many at one time. It is very hard to repay two or three short term loans plus all that high interest. For this reason, some states in the U.S. do limit the number of payday loans a person may have at any one time. The limit is two or three, if there is a limit. Cash advance lenders do not do credit checks, but they do have their own tracking system to know how many cash advance loans you have taken out. If their report shows you have too many, you will be denied another loan until the previous ones are repaid.

There is no credit check, but their internal system will also indicate if you have defaulted on a previous payday loan. This is another cause for denial. These rules are for the good of the borrower. Being highly overloaded with payday loan debt can be a catastrophe for the borrower. Lenders are already making these loans for persons with little or no credit, or poor credit records. High risk involves high fees, and those with bad or no credit will pay that high price.

Buyer Beware

Not being able to charge a profitable interest rate for high risk, short term loans is one reason why banks and other financial institutions do not make these types of loans. Being profitable with high interest fees is the main reason why cash advance lenders are popping up everywhere, including on the Internet. As with any product, the caveat is always buyer beware. Emergency loans are very useful, but care must be taken to get out of them quickly. Do not get trapped in the pitfalls of payday loans.