How Payday Loans Destroy Finances?

Let's begin with understanding what a payday loan is. Payday loans are short term loans, usually availed for a few weeks. They work best for people who need money in a hurry. Payday lenders do not check your credit history. They consider your income and bank account statements. The process of approving a payday loan is usually completed within a few minutes. Most people who are in their first job and need money for the initial months; avail payday loans.

If such a loan is easily available so fast with minimum documentation; why opt for other loans? This is because payday loans are the easier to avail, but the most difficult to pay off. Imagine a loan with 1% interest a day. Let’s understand payday loans in a better way.

Payday loans are short-term high-interest loans. The interest rate ranges from 0.5% to 1.5% a day. This is a really high interest but gets hidden in the details. People fail to detect the high interest as these loans have a limited tenure of a month or a couple of months. But, failing to repay the payday loan gets borrowers in real trouble.

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See Also: The Top Advantages of Using Payday Loans

How Payday Loans Destroy Finances?

What happens if you fail to repay payday loan?

Well, you could face harassment from recovery agents and legal action may be taken by the lender. There could be heavy penalty charges.

• The payday loans charge higher interest rates of 1-2% a day. The processing fee is 1.5-2% of the loan amount. On default the lender could impose a 4% interest rate as late payment penalty. Legal action could follow.
• You must take a personal loan to repay the payday loan. The personal loan interest rates at 14-22% a year are much lower than payday loan rates. You can easily avail a personal loan to repay payday loans. You can also negotiate with the lender for lower interest rates and repay payday loans in time.
• Never avail a payday loan if you can’t repay on time. You can land in the loan trap with an interest of 1-2% a day. Take the payday loan only for emergencies and don’t make this a monthly affair.
• Though many people consider payday lenders to be loan sharks, they do warn you before availing the payday loan. A popular payday lender charges 1bps (This is 0.01%) every time a borrower comes back for more payday loans. This payday lender does charge 1% interest per day. But, with this extra 0.01% for repeat borrowers, it discourages you from availing payday loans other than for emergencies.

There have been tales of horror from people who have struggled to repay payday loans. Recovery agents have threatened them saying they would inform all contacts that the person is not repaying payday loans. Many people make videos promising to repay the payday lender in time. They get blackmailed by recovery agents. Finally, payday loan defaults are referred to all lenders. This affects effects credit score and you won’t be able to avail home loans or car loans in the future.

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