The Drawbacks Of Payday Loans: Why Are They Dangerous?

What Are Payday Loans?

You need to know how a payday loan works.

You can get a payday loan and have the money in your bank account in as little as two to three weeks.

A borrower can only repay the loan's principal amount in five months.

The Drawbacks Of Payday Loans: Why Are They Dangerous?: eAskme
The Drawbacks Of Payday Loans: Why Are They Dangerous?: eAskme

How Does One Acquire Payday Loans?

In addition to understanding the flaws of payday loans, you should also comprehend how they operate. The lender is responsible for adding interest to the loan amount.

This should ensure that the lenders receive the agreed-upon payment on the agreed-upon date.

For instance, if a payday lender agrees to lend you $500 for 20 days, you must repay the loan within 20 days.

The borrower could pay interest on the total cost of the loan to defer this amount. Payday loans carry high-interest rates and must be repaid rapidly.

Who Uses Payday Loans?

The Community Financial Services Association of America says there are about 18,600 payday advance places in the United States, and 19 million households have borrowed $38.5 billion from these places.

Payday loans are popular because they are easy to get, and you can get cash quickly. This is especially true for people with limited or no access to traditional credit.

Cash advance lenders depend on repeat customers, usually low-income minorities, and charge very high-interest rates that add up over time. They don't usually offer repayment plans to people who borrow money, and they don't have to answer to many rules in many states.

People on a salary who can't make ends meet from one paycheck to the next are reached through TV, radio, the Internet, and direct mail. Even though the loans are advertised as a way to help with unexpected emergencies, seven out of ten people who take them out use them to pay for rent and utilities.

Cash advance lenders offer loans like cash advances, check advances, post-dated check loans, and loans with delayed deposits. Their loans are easy to get because they don't check credit histories very often. However, their interest rates are very high, and their customers are some of the least educated in the country.

Still, as income from payday loans goes down, issuers of subprime credit cards have made a lot of money, keeping subprime consumer lending pretty stable over the last few years.

Why Do You Believe Individuals Acquire Payday Loans?

People get payday loans for many different reasons, but the most common is that they need cash quickly to solve a problem.

Bad credit People are used to getting payday loans without checking their credit. People who lose their jobs but still make a good living often take out payday loans because they need cash.

The first steps to consider are getting a loan and researching a potential market. Payday lenders such as RixLoans help people who don't have any savings.

What Makes Payday Loans Distinct From Other Types Of Loans?

Payday loans are distinguished from traditional loans by the brief repayment period.

This loan is typically due when the borrower receives their next paycheck.

Therefore, you typically have two weeks to repay a payday loan before the balance rolls over and you incur additional interest charges.

Pros of payday loans:

Payday loans are a quick and easy way to get cash when you don't have any coming in.

Payday loans appeal to a wide range of people because they are available to people with all kinds of credit and income.

Here are some good things about payday loans that appeal to people who need money quickly.

It's easy to apply and get approved:

People know that payday loans are easy to get and easy to get to.

No longer do you have to go to a bank or credit union in person to do banking business. This also applies to payday loans.

A quick and easy online payday loan application process can quickly help people who need cash.

You can find lenders willing and able to work with borrowers by doing a quick search online.

Many online loan applications can be filled out in less than 10 minutes.

Since payday loans don't require a credit check, many people can get them immediately.

Getting money quickly:

Because it's easy to get a cash advance, you can get the money much faster than with a personal loan, which can take weeks to be approved.

Some people who fill out an application for a payday loan can get the money within 24 hours.

less paperwork than other loans:

People need to be at least 18 years old and have a valid SSN, a photo ID, and proof of income to get a payday loan.

This makes it easier for people with little or no credit history to get a loan.

No strict credit checks are done:

You don't need to have good credit to get a payday loan.

Lenders don't pull your credit report, which would typically cause a hard inquiry that could hurt your credit score.

This can be a reason for people with bad credit or no credit history to borrow.

There's nothing to back it up:

If you don't pay back a personal loan, the lender can't take your property like they can with a car loan or a mortgage.

If you don't pay back your payday loan, the lender may sue you or send your debt to a collection agency.

Cons of payday loans:

Even though payday loans can be helpful, they come with high-interest rates and a high chance of getting stuck in a cycle of debt.

Here are some things you should think about before getting a cash advance.

Rates of interest are high:

Most of the time, you will have to pay more than what you took out.

Depending on where you live, payday loans may have high-interest rates that could cost you more than six times what you borrowed.

Due to the high-interest rates that keep people in a cycle of debt, many states, like Vermont and Arizona, have even made it illegal to get a payday loan.

Short time to pay back:

Other loans, like auto loans and mortgages, give the borrower a lot of time to pay back the balance.

This is especially true if you need to pay for rent, utilities, and other bills with the money you earn.

But because payday loans have a short time to pay back, it can be hard to do so all at once without having a balance left over.

An increase in the number of bad loans:

People often think that payday loans are a form of predatory lending.

Predatory lending is when a loan is unfair, or the borrower can't pay it back.

This can trap the borrower in a cycle of debt.

Some signs of predatory lending are when the lender doesn't check to see if you'll be able to repay the loan and when the loan doesn't help you build your credit.

High chance of getting stuck in the cycle of debt:

When the borrower can't pay back the loan in full on the due date, they have to roll it over to the next billing cycle, like carrying a balance on a credit card.

This lets the lender charge you more interest and keep you in debt.

If you don't pay back the debt within 60 days, the lender can send it to a collection agency.

No good thing for credit:

The fact that payday loans don't assist you in building credit is among their worst qualities.

The three major credit bureaus, Experian®, Equifax®, and TransUnion®, rarely receive payday lenders' reports.

This indicates that getting a loan won't raise your credit score. However, paying off a car or mortgage loan can raise your credit score.

Intended for people of color:

Payday lenders are most common in neighborhoods where people of color make up the majority.

A 2016 study found that there were twice as many payday loan sites in Black and Hispanic communities as in white communities.

Payday lenders also specifically market to people of color. Over 30 percent of payday lenders' marketing pictures show Hispanic customers, even though they make up less than 20 percent of payday and title loan borrowers.

Lenders can get into your bank account:

When you get a payday loan, the lender will usually give you quick cash if you let them into your bank account.

Some payday lenders will try to take the money they are owed out of your account without your permission.

This is possible because they were able to get into your bank account in the first place to deposit the cash advance.

Chance of being sued for an unpaid bill:

If you pay back your payday loan in less than 60 days, the lender can send your debt to a collection agency.

Even though payday lenders don't usually sue people who don't pay back their loans, collection agencies can do so.

Suppose lenders or debt collection agencies try to scare you into paying your balance quickly by saying they will sue you or take money out of your paycheck. In that case, you can call a local nonprofit, an accredited financial counselor, or a credit counselor for help.

How Does One Become Eligible For A Payday Loan?

Borrowers of payday loans can quickly be approved for this kind of short-term loan. A borrower only needs to have an active, open checking account.

The payday borrower will also need to show documentation of their source of income and provide identification.

A payday loan provider won't check your credit or ask other questions.

Many borrowers wind up in a payday loan trap, unable to repay their debt within the repayment period because lenders need to check their credit scores.

Must I Take Out A Payday Loan?

Your financial situation will determine whether you should apply for a payday loan.

If you can find a payday loan that won't cost you a lot to repay and you have an unexpected bill that needs to be paid a few days before your next paycheck, it might be a viable option.

However, payday loans can become more expensive in the long run due to high-interest rates and additional fees, meaning they might only sometimes be the best choice.

Even though they are becoming a more and more popular option for people dealing with unforeseen bills, Make sure you can afford to pay back the total before you take out any loan.

People with financial difficulties can get free assistance and guidance from experts.

To help you with your financial situation, this organization offers its services.

It offers guidance on managing your debts and developing a personal budget.

The Impact of Payday Loans on Your Credit:

Payday loans' impact on your credit score depends entirely on how you manage the loan and your personal responsibility.

When weighing the benefits and drawbacks of payday loans, consider this.

If the short-term loan lenders you are applying through decide to conduct a hard inquiry on your report while applying for small cash loans, that will be reflected.

If this hurts, your report will depend on how many hard inquiries are already open.

Your credit score is unaffected if you make responsible financial decisions and pay your bills on time. Your credit score will be acceptable even if you repeatedly renew the loan.

Author: Kimberly Chantal Parkes

Kimberly Chantal Parkes: eAskme

Kimberly Chantal Parkes is a former contributor to Rixloans. Kimberly Chantal is a freelance copy editor and writer specializing in personal financial planning. After graduating from Kansas State University with a bachelor's degree in journalism, she began her career in media wearing many hats for community newspapers within the Kansas City area: writer, copy editor, photographer, and coffee runner, among other things.

If you still have any question, feel free to ask me via comments.

If you find this article interesting, don’t forget to share it with your friends and family.


Because, Sharing is Caring!

Don't forget to like us FB and join the eAskme newsletter to stay tuned with us.

Other helpful guides for you;