Payday loans may seem like a quick fix when in need of cash. Most applicants for these loans are approved fast and without question, which can also seem appealing. In reality, though, payday loans can be some of the most dangerous methods for consumers to help themselves financially.
Once a consumer defaults on their initial payday loan, the interest rates, and fees can become insurmountable. Unfortunately, these loans and the associated fees are legal in most states. Avoiding the sting of a payday loan’s high-interest rate starts by being aware of these financial pitfalls.
Why Are Payday Loans So Popular?
Each year, more and more consumers find themselves trapped under a mountain of compounding debt from overdue payday loans. Even recognizing that these short-term loans can be dangerous, many consumers are drawn to them like moths to flames.
Why are they so popular? Well, there are a few reasons why people choose to accept this risk.
- Payday loans are heavily advertised. Payday loan companies are constantly looking for financially unstable consumers either as brick-and-mortar businesses or, more widely, through online businesses and offers.
- The initial fees seem manageable. When the loan is first reviewed, the repayment amounts don’t sound outrageous. It’s not until a consumer can’t repay on time that these loans begin to show their true colors.
- People need money. The biggest motivation for choosing a high-interest, short-term loan is a need for quick cash. Many consumers are already living paycheck to paycheck. Even the slightest deviation in a tight budget can cause a tailspin. Distressed feelings and a lack of options often lead to desperate measures.
Why Do Many Americans Opt for Payday Loans?
Payday loans are a big business. On average, over 12 million Americans are signing up for these dubious financial stop-gaps. In most cases, these consumers are not in a healthy financial position and are as likely to default as paying back the loans. Unfortunately, most payday lenders not only know this but consider defaults part of their overall revenue strategy.
The problems faced by people who opt for payday loans:
One of the biggest mistakes payday loan borrowers face is not paying attention to how the loans can change if they aren’t repaid on time.
- Exorbitant interest rates and fees- Most payday loans are structured to be paid back in a short amount, usually two weeks or a month. The loan amounts are generally small. $25 per $100 borrowed is a fairly standard amount. When these amounts are measured as an annual percentage rate, it becomes clear how much more the consumer is on the hook for. Consider also that if a person is only borrowing $100, an additional repayment fee of $25 may be challenging to cover. Now they’re suddenly stuck in a loan default cycle, which will be nearly impossible to escape.
- Bad credit scores- Once a consumer defaults on a payday loan, they endanger and degrade any positive credit scores they may have previously built up. Most consumers considering a payday loan probably don’t have the best credit scores, so a loan default will only worsen their situation.
- Debt collection calls- When consumers fall behind on debt repayments, they also find themselves on the radars of debt collection agencies. These companies can be ruthless, as their primary business is to track down and relentlessly pester people until they pay up. Some debt collection companies even threaten consumers to the point of paying back more than they owe, simply out of fear and bewilderment.
4 Facts About Payday Loan Interest Rates
As we’ve been discussing, payday loans can seem harmless at first but, on further inspection, have outrageous annual percentage rates. These compounding rates and fees can trap consumers.
The average APR of payday loans
What’s most alarming about the high APRs of payday loans is why they’re still allowed to be charged. Some states have made rules to protect their citizens, while others have remained neutral or have only applied diminutive safeguards. In truth, it’s buyer beware.
We mentioned that a $25 repayment fee for a $100 loan is fairly standard. When calculated for APR, this loan repayment equals 650%! With these figures in mind, it’s easy to see how the repayment of a relatively small loan can completely overwhelm a person who’s already struggling financially.
Are payday loans better than credit loans?
As we’ve discussed, payday loans are often in the three-figure range. 400%-600% is relatively standard for numerous payday loan repayments. The average APR on a credit card in 2022 is 17%. A loan with a bank or financial institution can reduce the rate even further to around 10%.
Since credit card companies and banks usually require semi-decent credit scores as part of their application process, many consumers with poor financial standing won’t be able to receive loans at more reasonable rates. They also feel they are forced to try their luck with the payday loan plan.
Your state may have made payday loans illegal!
After seeing many of their citizens taken advantage of by payday lenders, some states have taken steps to limit or regulate these companies more stringently. Some states have outlawed payday lenders altogether. Online lenders are sometimes able to find certain loopholes to allow them to operate still. Check here to see which protections your particular state may offer.
Do payday lenders misuse your bank information?
Payday lenders typically require the recipients to write a postdated check for the entire loan amount, including fees. If the loan is not repaid, the lender can cash the check or debit the account electronically.
Now that the loan company has a consumer’s account information, they can continue debiting it. In most cases, the loan recipient doesn’t have the money to cover these charges, so their account overdrafts. Not only is the consumer now paying back the payday loan company, but they’re also receiving overdraft charges from their bank.
Here’s How to Avoid Paying the Incredible Interest Rates of Payday Loans
As with all financial endeavors, it’s critical to read the fine print, ask questions, and fully understand the agreement you’re about to enter into. Far too often, consumers applying for payday loans only consider alleviating the current situation and overlook the long-term dangers.
If you’ve already become ensnared in a payday loan, it’s not too late to get free, but it’s essential to reach out for help and avoid other risky financial leverages. One of the best options is to look for debt relief or consolidation options. These institutions will work with consumers to create reasonable repayment schedules which can be successfully followed.
Debt consolidation is a holistic option
Once a consumer chooses debt consolidation to help their situation, more options will open up. Consolidation helps to pause the seemingly endless calls from debt collectors. Knowing that the consumer has chosen to address their debt successfully, debt collectors have no more reason to attempt to collect.
The steady decline of credit scores can also be held off while repayments are made. Paying back overdue loans can help to rebuild credit scores. Regardless of the loan amount, consulting a third party to help the payment process is a wise choice.
Relief is within reach
Getting stuck in a payday loan debt spiral can seem like a never-ending cycle of repayment and default. Without some form of additional help, most consumers won’t be able to break the cycle. Fortunately, Real PDL Help focuses on helping consumers regain their financial freedom.
With debt consolidation, consumers can make headway in their path to loan repayment. By creating a plan which benefits both the payday loan company and the consumer, loan consolidation or relief is a win for everyone involved.
Consumers who need assistance with overdue loans and out-of-control interest rates should contact Real PDL Help today. See how these professionals can give you peace of mind again.
