Do you normally live from paycheck to paycheck? Payday loans can be a lifesaver for you. The good news is that these debts can help you sort out a number of issues in case you do not have money at that particular moment. Although these loans can feel be of great help during distress times, they can be detrimental to you as a borrower. Since these funds are availed almost instantly, they usually attract a lot of interest and can therefore hurt your budget in the long run. Sometimes, you might even pay more than you borrowed. In this article, we shall take a closer look at the risk of payday debt so that you can make better financial decisions in the future.
1. It is expensive
Like we have mentioned above, payday loans are expensive than other options. This is because these loans are usually offered at a higher interest compared to ordinary loans. For instance, if you walk to your nearest bank, chances are that you will get a loan at an affordable rate.
Also, if you choose to borrow some money from your friends, chances are that you will be able to save more as he or they might not ask you to pay back with interest. This makes payday debts more expensive.
Apart from this, there are high charges in case you default on these loans. You might end up paying double the amount you borrowed or even more. This is detrimental to low-income earners due to such penalties. In such situation there need to negotiate debt consolidation company for payday debt. And that is the final task for eliminating payday debt.
2. Some lenders are not licensed
Some lenders who offer payday loans are not licensed by the state. As a result, they might be punitive in the way they operate. For instance, some of them usually charge high-interest rates that make it difficult for most borrowers to pay their loans in time.
Using such predatory lending practices can make you incur huge expenses in the long run, especially when you want to service the loan. Also, they use cruel collection practices that end up embarrassing their clients.
3. Repayment is made by direct debit
As the name suggests, the lender usually debits your account on payday. Here, the lender will take money from you even before you pay for essential bills such as water and electricity bills. Also, you will not be able to buy food or even pay rent before paying the lender. This actually inconveniences a huge number of people as they are tempted to borrow more and incur more debts in the long run. As a result, payday debts are precarious.
4. Your credit score is at risk
If you take a payday loan and default on your payment, your credit score might be at risk. To put it into perspective, you might have a poor credit score rating, and this might have adverse effects in case you need a loan in the future. Most banks nowadays usually check the credit score of the individual before awarding him or her a loan. To be on the safe side, you should try to avoid payday debts.
5. The vicious cycle of debt
One problem with payday debts is that you will not be able to service them gradually. Instead, you have to come up with an entire sum of money that comprises the principal and the interest within a short period of time. Sometimes, this period can be two weeks or even one week.
Since this lump sum might be more than your income can handle, most borrowers end up renewing their loans and thereby remain in debt. It might surprise you, but the research shows that 4 out 5 payday loans are usually renewed every now and then.
Payday debts can be good if you can service the loan in good time. More specifically, if you have a stable source of income. However, if you are a low-income earner, chances are that you will encounter the above-mentioned risks, and this can be detrimental in the future.