At the time they’re taken out, payday loans may seem like a lifesaver. While some borrowers are able to pay the money back, without dire consequences, many borrowers get into a payday loan trap that they can never seem to get out of. Keep reading, to learn more about the problem and how to avoid it.
Multiple Loans/Repeated Loans
Taking out multiple loans is one of the easiest ways to get into the payday loan trap. Another way is to have a loan repeated. Repeating the loans of existing borrowers actually accounts for a whopping 3/4 of payday loan volume.
The average borrower deals with payday loan debt approximately 212 days of the year. Many of these borrowers take out as many as 12 loans, which is in itself a staggering number. Repeat customer loans result in more than $3.5 billion in fees and account for 60 percent of the industry’s business, as a whole.
Fees and High Interest
Statistics indicate that more than 12 million people take out payday loans, annually, in the United States alone. The typical interest rate on one of these loans is more than 200 percent. Unfortunately, this interest rate can climb even higher… into the 300 and 400 percent range, which is outrageous.
A few states have taken the initiative to place a cap on payday loan interest rates. The rates in these states are still high, but they no longer exceed double digits.
Using Loans for Everyday Expenses
It is recommended that you never use a payday loan for everyday living expenses or to purchase something that you just can’t live without, because chances are you CAN live without it. In today’s society, taking out one of these loans is easier than ever before. Not only are there hundreds of online lenders to choose from, there are in excess of two brick-and-mortar lending locations for every one Starbucks coffee shop.
Before you take out a payday loan, take the time to consider other options. These options include but are not limited to:
- asking a friend or family member for a loan
- having a garage sale or selling things on Craigslist
- picking up a part-time job
- offering services such as tutoring, housecleaning, desktop publishing, etc.
Yes, a payday loan can seem like a quick fix. But, it can also be compared to putting a Band-Aid on a severe injury. Nothing good comes from it and you’re at risk of ending up in even worse shape.
Financial data shows that individuals who take out payday loans are more likely to experience late credit card payments, overdraft fees, unpaid medical bills and more. Many times, these same individuals are eventually forced into bankruptcy.
Now that you know more about the dreaded payday loan trap, hopefully you’ll be able to avoid it in the future. Financial emergencies happen all the time. It’s just a way of life and no one is immune to the possibility. However, doing things like creating a budget and cutting back on unnecessary spending may give you just the cushion you need, when something unexpected pops up.