The Many Disadvantages of Payday Loans
In tough economic times, it is not uncommon to see someone going to get a payday loan. So many people lack a proper financial education, which causes them to make poor financial decisions. These decisions lead to poor financial situations, like a huge amount of debt that can be very difficult to get out of. Then, they make matters worse by getting a payday loan when there are so many other options for them. The following are just a few of the disadvantages that have the potential to cause more problems to those who use them.
High APR
It is no secret that payday loans come with a very high annual percentage rate (APR). There are many payday loan lenders who charge anywhere from 300% to 900% interest on these short term loans. This amount is much higher than any other loan you would get from a small bank or credit union, and credit card companies aren’t allowed to charge a rate anywhere near this. If you aren’t able to pay off the loan on time, the payday lender might even raise the interest rate on your loan even higher.
Little Regulation
Each state has its own laws and regulations for payday loans. Some states don’t allow them at all, while others have a specific maximum APR that the companies are allowed to charge. However, in the states that do allow payday loans, there are typically very few regulations to keep these companies from taking advantage of their customers. There are also very few federal regulations to prevent online payday loan companies from doing the same thing, which is why so many people find themselves paying more in interest than they took out for the initial loan.
The Vicious Cycle
Payday companies mainly make their money because repeat customers find it necessary to take out more loans to pay off their previous loans. After the two week period of the loan has expired and they aren’t able to pay off the loan, they are forced to roll over the loan for another two weeks, collecting more interest and making it harder for them to pay off the loan once again. They continue to roll over the loan until they are forced to take out another payday loan to pay off their existing loan. This vicious cycle will continue, putting them into more and more debt, and sometimes they are forced to file for bankruptcy.
Payday loans are not a solution, but they are merely a quick fix that will only temporarily put off a long term problem. The people who find it hard to pay off their payday loan usually have many financial issues, and they don’t have the proper financial education to make good financial decisions.
Hidden Terms
Some payday lenders can be very deceiving with their contracts. They take advantage of the fact that many of their customers won’t be able to afford legal defense and the fact that their customers are not usually well educated. They may leave out important contract information until the customer has already signed, and these hidden terms could cause the customer to pay more money than they thought they had agreed to. Suddenly, they are forced to pay for membership, service, extension, and other types of fees that they were not aware of when they signed the contract. While not all payday lenders use these sneaky strategies, it is important that anyone looking to take out a payday loan read through the entire contract and ask about hidden fees before they sign the agreement.
Elise Brown is an author who writes guest posts on the topics of business, marketing, credit cards, and personal finance. Additionally, she works for a website that focuses on educating readers about the payday loans.
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