Payday loans are prevalent among people who need instant access to cash without having to go through a credit check. To secure a payday loan, you just need to show identification, proof of steady pay and your bank account details. Payday loans are given for small amounts such as $500, and you are required to make the loan repayment when you receive your next paycheck. You must also pay the interest at the same time. Although payday loans are easily available, they pose a few disadvantages as listed below. In most cases, payday lenders set up traps so that borrowers end up taking more loans from them. It is therefore pertinent to exercise caution and restraint while making payday loans.
Repeat short term borrowing
The ease of availability of payday loans can put you through a never-ending cycle of taking loans. It is therefore advised that you resort to payday loans only in the event of an emergency. In an event when you can’t pay back a loan, your lender may offer you to take another loan for an additional fee. According to a study by Consumer Financial Protection Bureau (CFPB), four out of five people end up borrowing twice from their lenders within a month. Most of them borrow at least ten payday loans in a row. This further puts you in bad debts.
Initially, the interest may seem to be reasonable. For instance, a $30 interest on a $100 loan doesn’t look very high, but if you look at it in-depth, it is 782.15% APR. Thus, resulting in borrowers feeling trapped in debts.
If a borrower is unable to repay the loan or take an additional loan for repayment, they may have their funds withdrawn from their bank accounts, their government funds withheld and their purchases repossessed. They may even be subjected to harassment by debt collectors. According to CFPB, close to 20% of people who have taken no credit payday loans have gone through this.