The Risks of the Payday Loan

A payday loan is a high-interest loan that is repaid with your next paycheck.

This is a very short-term loan. Payday Loans are also called cash advance loans, deferred deposit loans, check advance loans, or postdated check loans. They are usually made to borrowers who have low or non-existent credit. 

The loans offer a seemingly easy way to pay for unexpected expenses or emergencies. Yet payday loans can end up being serious traps. 

Lender expect the loans to be repaid by the next paycheck or within two to four weeks. If a borrower is unable to repay the loan immediately, then it’s wise not to get this type of loan. 

According to the Consumer Financial Protection Bureau, the cost of a payday loan runs approximately $15 for every $100 borrowed. This is an interest rate of over 350%. While the typical payday loan carries an interest rate of over 350%. There are many payday loans with interest rates as high as 1,900%. By comparison, the interest rate on credit cards ranges from 12% to 30%. Borrowers are unable to get a credit card with a low interest rate, and so they take out payday loans. 

If the loan isn’t repaid by the next payday, then more interest compounds, and the cycle repeats. A borrower can end up owing more in interest than on the original loan amount. Payday loans are risky. A borrower can get stuck in a cycle of debt, and it will be hard to get out. 

Borrowers who are unable to repay their loans can damage their credit. The payday lender reports the nonpayment to the credit bureaus. The lender could also sell the loan to a collection agency. The collection agency could engage in many harassing practices to get repayment. 

For example, if the lender cannot debit a payment from the borrower’s bank account, then the lender will make more debit attempts. If those payments also fail, then a borrower could receive many bank charges for non-sufficient funds. 

If the non-payment continues, then the lender could file a civil suit against the borrower. If the lender wins the suit, then the borrower could be subject to wage garnishment. This is worse.

Payday loan practices are predatory in many states. The Consumer Financial Protection Bureau regulates these payday loan practices. Thirty-seven states have specific rules for payday loans. These laws could include alternate payment options or mandatory reporting of lender procedures.

Not all states allow payday lending. The states that allow payday lending stipulate that lenders get a license. If a payday lender does not have a license, then the loan is considered void. Unlicensed lenders do not have the right to collect on a payday loan, and borrowers do not have to repay an unlicensed lender.

It’s important to consider other options before taking out a payday loan. These options could include a personal loan, borrowing from family or friends, or taking out a secured credit card with a lower interest rate.