3 Reasons Why Payday Loans are a Trap You Don’t Want to Fall Into
People who have been “strapped for cash” and turn to payday loans for help have gone from “strapped” to “trapped” rather quickly.
Paydays loans are small-dollar loans that are meant to be paid off quickly, i.e. by the person’s next paycheck. The quick turnaround makes some people flippantly think of this as an advance on money that’s already coming their way and that it will be harmless. Sometimes this is the case, but not always.
These people are drawn into the payday loan trap because of the accessibility of fast cash. This industry is continuing to expand with more than 20,000 outlets across the country, according to NBC News. That’s more locations than McDonald’s!
The FTC–which works for the consumer by providing them information on how to spot and avoid any deceptive, fraudulent, or unfair business practices–recently posted this Consumer Alert. In response to payday loans scams, the FTC warns that this type of cash advance is a very expensive credit, and they advise consumers to find other alternatives.
Below are some additional reasons why payday loans are dangerous and why you should avoid them.
1. The interest rates are increasingly expensive
Annual percentage rates for credit cards can start at 9% and reach up into the 35% range. Sounds expensive, right? Now imagine an interest rate about 12 times that amount. That’s what happens with payday loans. The maximum APR charged by Commerce and Banner is 117%.
Payday loans are much more expensive than other standard methods of borrowing. For example, if you get a $100 loan and in 10 days it costs $15 in interest, you might tend to think that $15 isn’t that much. The fact that they are small dollar loans might make it seem like not a big deal, but if you do the math, the APR for this small loan was 400%! With interest rates like that, it can quickly drain your already scant account.
2. Once the debt starts piling on, you're stuck in a vicious cycle
Once again, with those high interest rates, it’s very easy to fall into debt. When the day comes that you must pay that loan back and you don’t have sufficient funds, it’s very simple to take the easy way out and pay that $20 rollover fee because you think you can have the money next paycheck. But what if you are still unable to pay and now you have even more to pay back by then? Now you’re stuck in a vicious cycle where your debt starts to pile up.
If you continue to make those rollover payments, you can end up paying the same amount as your original loan while still not making any progress on paying that original loan back! All the while, interest is still piling up and even with just one little mistake, your debt can quadruple in just one year.
3. Your credit score can be negatively affected
Payday loan outlets are most often found in neighborhoods where the residents are not able to qualify for mainstream loans. Many of these people turn to payday loans in the first place because their credit is bad. However, what some fail to realize is that a payday loan can also hurt your credit score. This type of borrowing is less substantial than an auto loan, a credit card, or an installment loan and therefore it can have a negative impact. It might not be a very large drop, but sometimes small dings in your credit will add up to problems eventually.
Before you think about getting a payday loan, take a look at the dangers above. Traditional installment lenders like Banner Finance/Commerce Finance family of businesses want to protect people from falling into the payday loan trap without limiting their access to small-dollar credit.
Some alternatives to payday loans include:
- Ask any relative to lend you money
- Ask for an advance from your employer
- Ask your creditor for additional time to pay your bill
- Take a Traditional Installment Loan From Banner Finance / Commerce Finance
(you can apply for an installment loan here)
- Charge it to your credit card
- Use cash advances on a credit card
- Acquire a line of credit from any FDIC-approved lenders
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