Emergencies always arrive uninvited, and if you are not financially prepared, the first thing that comes to mind is a payday loan. However, is this a wise decision? These days, you will find plenty of payday lenders online, offering easy and quick access to cash. The concept of this loan is pretty straightforward. Borrow a small amount with an additional fee and pay it back when you get your next paycheck. Sounds too good to be true, right? Well, it’s not!
If you are short on cash, we suggest you borrow from your family or friends, or you can sell a valuable to cover the cost. You can also prioritize your spending and use the Envelope Method to save for future expenses. We can list a dozen more tips to help you create a savings account.
Costly Fee
A payday loan comes with a costly fee, which is usually higher than other loans. If you miss a payment and think this might lead to a default, you can talk to the lender and extend the loan period. However, borrowing more time comes at a cost. This cost will be added to the initial fee and interest rate and increase the overall repayment.
High-Interest Rate
One of the biggest reasons why a payday loan can be financially crippling is because it comes with high interest. If the borrowing amount is $100, you will be charged between $15 and $30, which might seem like 15%. However, compared to other loans, this is equivalent to an annual interest of 390%, which is ten times higher than credit card interest.
Will Lower Your Credit Score
Paying off a payday loan on time will not improve your credit score. If you miss a payment, it will lower the numbers. Moreover, the negative marking on your credit report will stay for around seven years, which can impact your future chances of securing a bigger loan.
Automatic Payment
Some payday lenders require you to sign a contract that states the amount you owe will be automatically deducted from your account. If your bank is empty and the date comes around to make the payment, you will be charged a fee by the bank.
Can Trap You Into A Debt Cycle
The black hole that a payday loan sucks you in can trap you for life. Borrowers are often unable to payback the loan. They keep extending the date, which increases the interest rate and doubles the loan fee. They take out another loan, and the cycle continues. A payday loan’s quick turnaround is its most attractive feature, which gives you the peace of mind that you will pay it off the next month. The high-interest rate can hit you hard, and in some cases, borrowers decide to extend the repayment period, which increases the interest rate further. As a result, the interest on the loan is the same as the original amount you took.