Payday loan providers are almost everywhere now as more and more people turn to them to get some quick cash. Payday loans typically have high interest rates and are almost always for a very short term – usually less than a month as they are an advance against the borrower’s next paycheck/payday, hence their name. Believe it or not, these types of loans are banned in 11 states, and for good reason. Many people consider using payday loans about as financially irresponsible as gambling at a casino.
Payday Loans’ Cycle of Debt
The worst thing about payday loans is that they trap the lender into a cycle of debt because once a lender uses a payday loan, they are essentially forced to use one again and again to make up for the money lost on their previous paycheck due to the previous payday loan. For every financial transaction, someone loses money and someone makes money. When it comes to payday loans, the lenders are the ones who make money and borrowers are the ones who lose money.The only way to break the payday loan trap is to increase your income stream or drastically cut your expenses, so that you don’t have to get a payday loan to cover your previous paycheck. The main problem with payday loans is the extremely high interest rates. Some payday loans can even have the equivalent of annual interest rates of almost 1,000%! Of course, a payday loan lending period doesn’t last a whole year, but it still gives you an idea of just how high the costs are to borrow payday loans.
Fortunately, in the states where payday loans are legal, the government is passing laws to make payday loans less expensive for people. There have been a number of reforms including placing limits on interest rates, the amount of loans a borrower can have at any one time, etc. There are also many people who are always trying to convince the government to outlaw payday loans nationwide due to their deceptive nature designed to prey on poor people in need.
Payday loans can seem attractive to people who have bills piling up and don’t have the cash necessary at the moment and that is why payday loans have become so common. Most people are ignorant about financial concepts such as compound interest, which is part of the reason why they don’t see the downsides of getting payday loans. My advice for these people is to simply become educated about how interest rates work so they can make smarter decisions about their finances. There are countless sources on the internet, e.g., Investopedia, that do a very good job of simplifying complex financial topics so that the average person can understand them. The bottom line is, payday loans should be avoided at all costs, no matter how badly you need them.
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