Recently, more and more people are asking for the assistance of a payday loan company in order to solve their temporary financial troubles. As appealing as such companies tend to be in the beginning, you will soon realize that this quick fix can be yet another financial trap. When you learn the truth about your payday loan, it is far from what you were first led to believe. One example of this is the lender’s failure to mention those high interest rates that payday loans are becoming so well-known for.
Payday Loans: Are They Worth the Costs?
One of the primary traps hidden behind the attractive appearance of payday loan companies are their unadvertised interest rates, which are much higher than you would expect them to be on such small amounts of money. These rates vary based upon the state in which you live and the laws that have been enacted within their jurisdictions.
How Much Interest Should You Expect to Pay for Your Payday Loan?
For example, the highest payday loan rates in the U.S. can be found in the states with the least amount of laws governing payday loans, namely Utah, Idaho and Nevada. There, people are paying nearly 600 percent interest on their payday loans. Colorado, Oregon and Maine currently offer the lowest interest rates which are still approximately 129 to 217 percent interest rates.
Before agreeing to a payday loan, find out exactly what you will be charged in regards to interest and other fees, remembering that most payday loan companies charge at least 36 percent of what your upcoming pre-tax paycheck will be.
Recurring Debt of Payday Loans
Another big trap that companies use includes the vicious payday loan debt cycle. Payday loan companies allow you – in fact, they encourage you – to rollover your debt into a new payday loan that allows you to put off payment for another week or two, until your next pay date.
This means those who cannot afford to pay back the amount they currently owe are allowed to let their debt roll over for another time, but this comes at a huge cost in terms of extra fees and interest rates. As interest rates are very high, you can see that letting this debt roll over has the potential to get out of control very quickly.
Unfortunately, it has been found that interest rates for payday loans can easily climb into the triple-digits if borrowers aren’t careful. Among these large numbers, people may also find that they have been charged numerous hidden fees. Once you’ve fallen into this cycle of debt created by rolling over payday loans, it is very difficult to recover financially.
For example, if your payday loan is for $100 and you need to repay it within two weeks, the cost of the initial loan might come with a $15 finance charge and an annual percentage rate of 391%. If you opt to roll-over this loan three times, the finance charge would increase to $60 for the same amount of $100 borrowed.
With the finance charges and interest rates added together, you could be paying nearly $1000 for your $100 payday loan. Since not all interest rates for payday loans are set at 391 percent, it is essential that you conduct a thorough research before signing for a payday loan.
Avoid the High Interest Rates of Payday Loans
It is understandable that payday loan companies need to make profit in order for their businesses to thrive. Additionally, there are times when you need and appreciate having somewhere that you can quickly borrow from when you’re in a pinch. Just remember that it is very difficult to get out of the vicious cycle that occurs after you’ve taken your first payday loan. Once you have taken the loan, you should begin cutting back on your spending to ensure the loan will be paid in full on the first due date.