If you have any doubt about being able to repay the loan on the original due date, you should seriously consider other means of borrowing.
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When the topic of discussion turns to payday loans, there are supporters and critics who are only too happy to weigh in on this alternative form of subprime lending. Opponents of these short-term loans claim that payday loan lenders charge extremely high interest rates. Supporters state that without access to the quick cash funds that these loans provide, many consumers would be forced to look for other sources of borrowing that are even more harmful and expensive.
The fact is that payday loans do serve a purpose as a means for working families and individuals to get much needed cash in a short amount of time. This is especially true for consumers who have poor credit histories and low credit scores. In the current economic climate of tighter lending requirements and stricter financial guidelines, most people who have less-than-perfect credit find it difficult to qualify for a conventional loan from a bank or credit union.
Approximately 33 states now allow some form of payday loan lending. The rules and regulations regarding these loans differ from state to state, with many states now attempting to cap the amount of interest that payday loan lenders can charge. However, these states have upheld the legitimacy of these payday loan companies and have acknowledged the economic necessity of payday loans.
In a report entitled “Comments to the Consumer Financial Protection Bureau on Payday Lending Abuses” published by the Center for Responsible Lending and released in April of 2020, researchers highlighted several risks that payday loans pose to consumers.
Payday loans are designed to create a long-term cycle of debt. Payday loans are considered short-term loans which means they are due to be fully repaid with a short amount of time- usually two weeks. Many borrowers are unable to repay the original loan within this time frame and are forced to take out another loan to pay off the initial one. Each new, two week loan comes with additional interest charges and fees.
Extended payment plans do not provide a solution. Some payday loan companies do advertise this feature as a way to avoid long-term debt but statistics point out that very few customers are ever offered this option.
Payday loans can cause long-lasting financial harm. A large number of payday loan borrowers are unable to repay their loans and are then hit with additional fees and the potential threat of legal proceedings to recover the cost of the loan. Garnishment of wages is also a possibility. The use of payday loans exposes consumers to a higher rate of bank account closures and in extreme cases, bankruptcy.
Other possible risks
Following are other common mistakes that consumers make when it comes to payday loans.
Failure to fully repay the loan when it is due. A responsible borrower will always consider a payday loan as a short-term loan, which is exactly what it is. The longer it takes to repay the loan, the more additional interest charges and fees will accrue.
Failure to use a payday loan for a true financial emergency. A payday loan can be a good financial solution for a one-time cash emergency. However, these short-term loans are not designed to ease cash-flow problems due to consistent overspending or alleviate long-term debt problems. In fact, the opposite is true. Reckless use of payday loans can make a bad financial situation even worse.
Failure to shop around for the best deal. Terms and conditions of payday loans vary from lender to lender. A smart consumer will take the time to do some research and find the best loan terms from a reputable direct lenders loan tribal.
Payday loans are not without risk. But this holds true for almost any type of borrowing. These short-term loans can be a much-needed financial lifeline for those consumers who are faced with an emergency financial situation that can’t wait until the next payday. Here are some important points to consider before deciding whether a payday loan is right for you:
Investigate other possible sources of borrowing. These include a cash advance from your employer, a small personal loan from your bank or credit union, a credit card advance, or borrowing from a close friend or relative.
Be honest about what the payday loan is for. Wanting to go on a shopping spree is not a legitimate reason to take out a payday loan. Short-term loans should be considered as a one-time solution to an unexpected financial emergency.
Make certain that you will have the funds to fully repay the loan when it is due. The dangerous cycle of debt begins with renewing the original loan and then never having the funds to fully pay it off. If you have any doubt about being able to repay the loan on the original due date, you should seriously consider other means of borrowing.