Payday lenders often use persuasive advertisements to make you believe they have the divine answer to your financial worries. But the reality is that you need to be aware of the potential dangers associated with payday loans.
This type of loan can be difficult to repay, and it could end up costing you a lot more than what you borrowed if you’re not careful. Before you apply, know what you are getting into and the risks involved in taking out a payday loan.
A personal loan, also called a short-term cash loan, is a form of credit with a short repayment term. Borrowers are generally required to repay when they receive their salary, hence the term “payday loan.” The repayment period is based on how often you receive your paycheck, whether it’s weekly, bi-weekly, or monthly. You can apply for a payday loan of up to $ 2,000.
Payday loans are convenient, but this convenience comes at a high price. In addition to the principal amount, you will also pay a fixed fee regulated by the Australian Securities and Investments Commission (ASIC). By law, the majority of payday loan fees are capped.
It generally consists of a set-up commission (the maximum commission is 20% of the amount borrowed) and a monthly loan commission (a maximum of 4% of the amount borrowed). The majority of payday lenders charge the maximum amount possible, but some lenders offer more affordable rates.
Payday loans work differently from personal cash loans. The main difference between a personal loan and a personal loan is in the basic conditions. The payday loan repayment period can be as short as 16 days or as long as 12 months. In the meantime, the minimum term for a personal loan is one year.
In addition, payday loans are easier to access than personal loans. Depending on your location, you can apply for a payday loan online or through a physical branch with a payday lender. Payday lenders offer online applications and a quick turnaround time for loan applications (usually within 24 hours). During this time, personal loans may take a few business days to be processed.
The popularity of payday loans is mainly attributed to the flexible loan criteria of its lenders. It is considered to be one of the more expensive financial products because payday lenders accept requests that more affordable lenders like banks would reject.
Customers with low credit scores, poor credit history, and people with low incomes can apply for a payday loan as long as they can prove that they will be able to repay their debt.
To learn more about payday loans, click here.
Payday loans are generally considered to be “quick” solutions to financial problems. But it may not be. Here are the reasons why a payday loan can do more harm than good to your financial situation:
Very high costs
While a payday loan may seem like an easy solution to your financial dilemmas, it comes with a lot of fees and it’s not the cheapest option. As mentioned, payday loans have very high fees which equates to high annual interest rates. Payday lenders are not legally required to disclose the annualized interest rate on loans.
Payday lenders are legally required to post risk warnings on their websites. However, these warnings are often obscure. For example, some payday lenders indicate on their website that you will be charged a fee of $ 7 per day for late payments, but this warning will only be explained in the fine print. Ignoring these fees can result in higher refunds than you may not be able to afford.
Make sure you read the fine print before applying for a payday loan. It is also advisable to make an informed decision when comparing and applying for short-term payday loans. You can use a payday loan calculator to estimate how much you will pay in fees, the total cost of the loan, and the number of your repayments.
Has the potential to be a debt trap
One of the biggest dangers that can arise with payday loans is when you fall into a cycle of repeatedly extending your loan.
If you are unable to make payday repayments, you are allowed to extend the loan for another period. You will continue to spend borrowed money and accumulate late fees that keep piling up, which can only make your financial situation more problematic.
If you default (or don’t pay off the loan on the due date), you will also be charged a default fee that will be added to your debt. The amount that can be charged in default fees can be double the amount you borrowed.
In some cases, clients borrow money again to pay off the last loan. And this can go on indefinitely since there is no limit to the number of times a person can apply for this type of loan. Eventually, it becomes a vicious cycle that will drag you deeper into debt.
It can affect your credit rating
Every loan application you make will show up on your credit report. While the rejection of a loan does not have a direct impact on your credit score, your actions after rejection can. In particular, if you continue to apply for loans that you are not eligible for, it will trigger several serious inquiries, which can adversely affect your credit score.
If you cannot repay the loan due to the high costs, it can also negatively affect your credit score.
If it’s too good to be true, it probably is. Payday loans may seem like an easy way to cope with the financial difficulties in your life, but the high fees and short repayment period that come with this financial product present a real danger of putting you in further debt.
Most people who take out payday loans experience financial difficulties. Before applying for a payday loan, you should explore the other consumer loan options available to you. In addition, read on what to consider when evaluating a payday loan.
Want to know if a payday loan is the best option for your financial situation? Explore NestEgg for more information.
Are Payday Loans Dangerous?
Last updated: June 25, 2020
Posted: March 26, 2020