Why Payday Loans Are Dangerous

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It’s hard to find yourself in a situation where you need money right now, but you are not alone. According to a study by the Global Financial Literacy Excellence Center at George Washington University, 42% of millennials have used methods like payday loans as a means of managing debt.

See: What Not To Do When Trying To Get Out Of Debt
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So what is a payday loan? The Consumer Financial Protection Bureau defines a payday loan as a short-term, high-interest loan with no credit check that is typically no more than $ 500. Payday loans can be obtained online or through stationary locations. If you don’t have a financial cushion and need quick cash, a payday advance seems like a good solution. But using a payday loan to get rid of debt could be a costly mistake.

Read: 35 useless expenditures you need to cut off your budget now

Learn more about payday loans and why they may not be the best way to get out of debt.

Last updated: July 7, 2021

Payday Loan Sign

Payday Loan Sign

5 Reasons To Avoid Payday Loans

Payday loans can be tempting when you have limited financial resources, but before you sign on the dashed line, consider the dangers of payday loans. Read on to see five disadvantages of payday loans.

Read: 11 Basic Money Moves Everyone Should Make During Troubled Times

people-finance-concept-customer-pen-paper

people-finance-concept-customer-pen-paper

1. You create a debt cycle

When your financial resources are nearing exhaustion, obtaining a payday cash advance may help temporarily. But ultimately, all you do is position yourself to sink further into debt.

About 75% of payday loans are given to people who take out 11 or more loans per year, according to the CFPB. Unfortunately, many people are unable to repay their payday loans when they are due, so they pool the borrowed funds into a new loan and create a debt cycle.

Cashbox: The 8 best payday prepayment apps to bridge the cash gap

three-twenty dollar bills-sixty dollars

three-twenty dollar bills-sixty dollars

2. There are high fees

The APR on credit cards is usually between 12% and 30%. However, the average two-week payday loan has a fee of $ 15 per $ 100 – an APR that is nearly 400% per loan, according to the CFPB.

For example, a short term payday loan of $ 400 could cost you $ 60 in fees. And if you renew the loan often enough, you might end up owing just as much in fees as you originally borrowed.

Just look: 30 Ways To Get Out Of Debt

Businessman giving money us dollar bills

Businessman giving money us dollar bills

3. Rollovers allow you to go deeper into debt

When a payday loan comes due and you can’t pay the full amount, some lenders allow you to pay the initial fee only to extend the due date. But then another fee is pinned to the client for the same amount.

For example, if you borrowed $ 200 at a rate of $ 15 per $ 100, you owe $ 230 on your next payday. On your next payday, if you choose to pay the $ 30 fee to extend the loan, the lender will add an additional $ 30 fee and so on. Before you know it, you could be paying almost $ 100 in fees without reducing your principal.

businessman-office-speaking-on-the-phone

businessman-office-speaking-on-the-phone

4. You have the potential for repeated debt collection calls

Because these high risk loans are also expensive, you may not be able to repay your loan in a timely manner, which can lead to repeated calls to collection agencies. The Fair Debt Collection Practices Act states that a debt collection company, such as an online payday loan rep, cannot repeatedly contact you with the intent to annoy, abuse, or harass you. In addition, collection agencies should only call between 8 a.m. and 9 p.m.

Roof repairer-yellow-gloves-replace

Roof repairer-yellow-gloves-replace

5. They are not a solution to major financial problems

Payday storefront or online loans are typically capped at $ 500, according to the CFPB. So don’t expect this type of loan to help you get out of debt permanently or to help you with larger expenses such as roof replacement. The national average for a roof replacement is over $ 6,000, according to Fixer.com, a service website for tradespeople.

young-african-man-pours-milk-in-coffee

young-african-man-pours-milk-in-coffee

Alternatives to Payday Loans

With a little research, you can find others possible options to generate quick cash without high fees. Take a look at these alternatives to payday loans.

Hand giving money USA dollars

Hand giving money USA dollars

1. Borrow from a trusted friend or family member

Although it can be awkward, speak humbly to a friend or family member you trust and explain why you need to borrow. Offer to set up a specific, but realistic, written payment plan to show that you intend to repay the loan. Even if the person wants interest on lending you money, it likely won’t be as you would experience with a payday loan.

Read: I’ve Secretly Got Us Into Serious Debt: How To Get The News Out

professional-driver-taxi-chauffeur-driving-woman

professional-driver-taxi-chauffeur-driving-woman

2. Get a part-time job with immediate payout

Don’t underestimate the income potential of a good side job; Instant payout options are available. Such examples include, but are not limited to:

Lyft or Uber: As an alternative to taxi service, drive your car and receive an instant payout with just $ 50. You may have to pay a 50 cents instant withdrawal fee to receive your money, but it is your money, not money that you need to pay back.

Uber eats: Forget about dealing with passengers and instead deliver food as Part-time job or weekend job. Apply to Uber Eats, a delivery service for people who want food from their favorite restaurant to be delivered straight to their doorstep.

Craigslist Ads: Search gig ads to find jobs that are making money fast. You may find ways to help people pack for removals, driving jobs, cleaning jobs, or babysitting opportunities.

saleswoman-speaking-couple-happy-customers

saleswoman-speaking-couple-happy-customers

3. Seek credit advice

It can prove beneficial to have a trained professional who knows the ins and outs of debt management. Reach out to a reputable service, like the National Foundation for Credit Counseling, and speak to a credit counselor who can help you create a realistic and personalized budget as part of a debt relief plan.

focused-young-african-woman-sitting-alone

focused-young-african-woman-sitting-alone

Find other ways to pay off your debts

Payday loans can be incredibly dangerous to your financial health, especially if you are already struggling with debt. With the expensive fees of payday lenders and the ability to extend the loans more than once, you can easily find yourself in a debt cycle, a target of debt collection efforts, or both.

Take other steps to pay off immediate debts, such as: B. Loans from a friend or family member, or a part-time job with a quick payout. Then consider reaching out to a credit advisor who can help you work your way out of debt permanently.

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This article originally appeared on GOBankingRates.com: Why Payday Loans Are Dangerous