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Why should you not use payday loans?

Emergencies often happen when individuals expect less and if one is not financially prepared, disaster strikes. In such scenarios, individuals tend to search for available payday loans. A payday loan is a very short-term loan available through payday lenders that operates out of storefronts or online. These loans work best for individuals who need cash in a hurry as the application process is completed in a matter of minutes.  

Individuals prefer them due to the few requirements: unlike traditional personal loans, payday loans are verified through an individual’s ability to repay back the loan. Therefore, after the verification, the money is deposited into the verified bank account. More importantly, the lender has to write a postdated check for the loan payment and interest, e.g., when an individual is rendered a $200 loan on January 16, they are expected to write a check back to the lender that is dated after two weeks, which is January 30. This check will be for $230. The $200 is the loan payment plus $30 for the interest. The postdated check ensures that the lender is paid back on the scheduled day without chasing the client. With traditional loans, individuals need to have good credit, making them prefer payday loans since they don’t require a credit history.

Although the payday tends to be convenient, with no credit check, quick access can easily get one into a difficult financial position if they are not careful. One of the reasons one should not consider using a payday loan is the cost associated with it. Payday loans are expensive due to the high interest associated with them – The interest rate can be up to 400%. The payday lenders assess a fee for every $100 borrowed with an interest rate ranging from $15 – $30. Therefore, when the calculation is done, a $15 interest rate is actually equivalent to a 390% annual interest rate, which is more than 10 times the typical rate of a high-interest credit card. 

Payday loans can result in a debt cycle – Although the payday loans are paid back within two weeks, reports show that the average borrower stays in debt for a longer period. With the high-interest rate, it is easy for one to get caught in a repeat cycle for more than two weeks. Some also take another loan to pay off another loan, e.g., when an individual has an emergency and turns to the payday loan, there is a relief. However, when the payday comes, one realizes they don’t have enough money to pay the loan plus the interest rate. Therefore, they put more money to extend the loan, hoping to complete it at the next payday.

Facilitate unhealthy financial behavior – It’s easy and convenient to access a payday loan, but it results in a long-term financial problem.Until one can remedy the underlying problem, these loans strengthen unhealthy savings and spending habits, causing financial trouble? Although one may not see it as a big deal, some individuals turn to payday loans to meet daily expenses. Such borrowing is harmful since the more accustomed one is, the less likely to manage their finances properly.

The costly fee charged – The easy loan has a quick turnaround time and in most cases, borrowers tend to default the loan or run a risk of paying the additional cost to roll over the loan for more days. The additional fee is another reason why one should avoid payday loans, e.g., when an individual takes a $100 with an interest of $15, an added fee is included when the client chooses to renew the loan. Therefore, in the end, one owes the lender more money than what they should have paid in the initial payday.

Most of the individuals that use payday loans don’t think they can borrow money anywhere else, but the truth is there are so many alternatives available that one should consider. Credit unions are a very good place to start looking for a small loan. Also, one should shop before they decide by comparing APRs and finance charges from all available sources, etc.


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Dr. Paul Etienne is a financial and business consultant in Orlando, FL. Paul holds a Bachelor of Science degree, an MBA and a Doctorate in Business Administration with a concentration in Finance. He has worked for large, well-known financial firms throughout his career. Paul and his wife Vanessa share their home inCentral Florida with one extraordinary daughter named Delaney and a wonderful son named Vansley. Paul brings his longstanding experience and vast knowledge of the financial sector to his audience through his book, podcast, training courses and blogs, in which he aims to help as many people as possible with a wide variety of financial advice. He also blogs regularly on www.madbu.comon subjects ranging from personal finance, debt, budgeting, real estate investing, mortgages and retirement and more. In his free time, Paul likes to play the guitar and code, investing in real estate and helping others to become more aware of their finances. He is a lifelong student of all things and is always learning about new ideas.The future, as far as Dr. Paul is concerned, will see him helping more and more people to learn about managing their personal finance and assets, so that they can remain financially secure with the help oh his book and his budgeting app MadbuMax.