How Payday Loans Become a Vicious Cycle

Payday loans can be deceptive. You are forced to turn over a post-dated check for a loan and in addition, there is a possibility that you will be harassed and threatened because of some collection practices. The high rates of payday loans make it difficult for so many borrowers to repay the loan simply because they are already in a financial crisis.

When we are short of cash, Payday Loans or Check Advance Loans may seem like an easy way out of a temporary cash shortage but for many people, this can be the beginning of a vicious and expensive cycle where you will find difficulty getting out of in the long run.

An example of this situation would be about Carlie. Carlie was short of money to pay for her monthly bill and so she went to a payday lender and borrowed money to make up for the shortage and she was charged $50 for up to 15 days or 2 weeks. She needed to repay her loan when she receives her next paycheck in the next 15 days. When she got her check, she realized she didn’t have enough money to pay off the amount she borrowed with the $50 interest fee, so she paid the additional $50 to the lender and rolled her payday loan for another 2 weeks.This cycle went on for about 6 months and in the end, she had paid a total of $600 in fees and still owed the principal amount of $200. She had already paid 3 times more than what she borrowed and that puts her in a much deeper financial debt than she was in before she made the first loan.

The interest rates on a personal loan from a bank tend to be 10 times lower than even the lowest rate payday loans. Even a high-interest rate credit card has a much lower rate than a payday loan. The interest rates of payday loans rate from a whopping 300%  which may go up to to 1,000%.

A payday loan is requested for a short period of time, usually one to two weeks. You will be required to provide proof of employment and some identification and to secure the loan, you will also be required to write a post-dated check for the principal and interest fees of the loan.  A $100 loan can cost you $15 of interest for 2 weeks. This may seem reasonable enough  for an emergency situation,however, did you know that the annual interest rate on that loan can amount to 360%? If it becomes a vicious cycle, you will end up more badly in debt than you were in when you first borrowed money from the payday lender.

If the money you need is not for an extreme emergency, you may want to try these other alternatives for less expensive loans:

• Ask your employer for a pay or cash advance.
• Consider asking your friends and family for a loan first.
• Consider a credit card advance.
• Contact a local credit union for a small loan.
• Request additional time to pay the bill from your creditors.
• Try credit counseling.
• Prevent financial emergencies.

To prevent financial emergencies, take time to look at your income and expenses. Write it all down. Try to save a little money each time you get your paycheck. No matter how little, this still will add up and it’s still better to have some when you need it.