Watch Out For These 8 Dangers of Payday Loans

Payday loans seem like an easy fix when you need cash fast. Just walk into a storefront, show your ID, provide proof of income, and walk out with a few hundred dollars.

No lengthy application, no credit check, no waiting. But these loans come with major risks that make them, more often than not, a bad deal. Keep reading to understand why you should avoid payday loans.

#1 The Deceptive Allure Of Quick Cash

Payday loans are small, short-term loans with high fees. You typically write a post-dated check for the loan amount plus a fee, with the lender cashing the check on your next payday. The loans are usually $500 or less and have terms of 2-4 weeks. You must have income and a bank account to qualify.

Key Takeaway: Payday loans provide fast cash through high-fee, short-term small loans paid back on your next payday.

#2 Exorbitant Interest Rates

While getting cash quickly is appealing, consider the cost. Payday loans can charge interest rates up to (or over) 600% APR. So a $500 loan with a 375% APR and a two week term means you pay back $575. That’s $75 in interest for a two-week loan! If you extend the loan term, you rack up much more in fees.

Key Takeaway: Payday loans charge astronomical interest rates, often 200-400% APR, making costs pile up quickly.

#3 Debt Traps and Cycles of Debt

The short repayment period makes these loans hard to pay off without re-borrowing. About 80% of payday loans get rolled over into a new loan within two weeks. This is how lenders trap you in cycles of debt. Even if you eventually pay off the balance, recurring fees can end up costing you many times more than the original loan amount.

Key Takeaway: It’s very common to get trapped in cycles of debt with payday loans due to unaffordable repayment terms and constant renewal fees.

#4 Hidden Fees and Terms

Read the fine print! Payday lenders often hide fees and confusing terms deep in the loan agreement. You may find clauses to extend repayment dates, change due dates, or charge for every little service like phone payments or late fees. Double-check the loan terms and get clarification so you know the total cost.

Key Takeaway: Payday loan agreements frequently include hidden fees and terms that can drastically increase costs for borrowers.

#5 Impact on Credit Score

While payday lenders typically don’t report loans to credit bureaus, that changes if you default. A defaulted payday loan gets sold to debt collectors and shows up on your credit report, tanking your score. This damages your ability to get other loans, credit cards, mortgages, rental leases, and more.

Key Takeaway: Defaulting on a payday loan leads to credit damage plus harassment from aggressive debt collectors.

#6 Predatory Lending Practices

Some payday lenders use unfair, deceptive and abusive practices. They may set up near military bases, low-income neighborhoods, universities and other vulnerable communities. Some incorrectly tell borrowers the loans will improve credit or provide credit counseling. Make sure to report any predatory lending you experience to authorities.

Key Takeaway: Payday lenders often target and mislead vulnerable borrowers with unfair and abusive lending tactics.

#7 Lack of Federal Protection

Payday lenders operate outside many state usury laws due to special exemptions. And payday loans don’t follow federal Truth in Lending disclosure requirements that regulate credit cards and other loan products. This lack of regulation means fewer consumer protections against the extreme rates and fees. However, some much-needed rules are starting to be enacted.

Key Takeaway: Historically lax regulation of the payday lending industry leaves consumers open to exploitation from sky-high fees and rates.

Are Online Personal Loans a Safer Option?

Rather than resorting to payday loans, first exhaust safer alternatives:

• Borrow from family or friends
• Seek help from social service agencies or nonprofits
• Ask creditors for extensions or payment plans
• Consider a traditional personal loan from your bank or credit union

Reputable online lenders like Level also provide personal installment loans with set repayment plans and no hidden fees. While still carrying higher interest than some products, their rates pale in comparison to payday loans.

Final Thoughts

The risks heavily outweigh the potential benefits for most borrowers. Save payday loans as an absolute last resort when facing dire emergencies without other options. Carefully consider cheaper alternatives first. And proceed with extreme caution by reading the fine print to understand the full costs you take on. Avoid the cycle of debt traps by making informed decisions to manage your financial health.