Payday lenders can seem like the perfect solution when you face a financial emergency. Many of the lenders will let you borrow money as long as you show proof that you have a job and earn a regular income.
Unfortunately, borrowing money from a payday lender can lead you down a road of increasing debt. If you think that payday lending is your best option, consider these three reasons that you should avoid this type of lender.
1. Payday Lenders Charge Outrageous Interest Rates
Payday loan interest rates vary from state to state. While some states have capped the amount of interest that lenders can charge, other states let payday lenders charge as much as they want. In some states borrowers can expect to pay an average annual interest rate of 582 percent.
The Consumer Finance Protection Bureau estimates that most people pay $15 in interest for every $100 they borrow. This amount comes to an annual percentage rate (APR*) of nearly 400 percent. Compare that to credit card APRs*, which typically range from 12 to 30 percent, and you can easily see that payday lenders charge outrageous interest rates.
Credit card companies get criticized for charging high interest rates, but you can actually save money by borrowing from your credit card company compared to using a payday lender.
2. Most People Cannot Repay the Loans on Time
When you borrow money from a payday lender, you agree to repay the loan when you get your next paycheck. In reality, more than 80 percent of people roll their loans over to the next term because they cannot afford to repay them.
Borrowers who do not repay their loans before the term's end (usually within 14 days) often fall into a spiral of debt that quickly becomes overwhelming. Late fees and high interest rates make it nearly impossible for borrowers to repay the lenders. As the amount owed continues to grow, borrowers find themselves trapped, with no way to get out of debt.
Payday lenders earn higher profits when you cannot afford to repay them on time. Most of them, therefore, are perfectly happy to roll over your loan. The more money you owe, the more they make.
3. Payday Loans Don't Solve Financial Problems
Payday lending may seem like the only way for you to pay bills on time, get your car repaired or purchase essential items such as groceries. Borrowing money, however, only creates a short-term solution to your financial problems. The underlying issue comes from spending more than you can afford.
If you don't create and follow a budget, then your financial troubles will continue indefinitely. Borrowing $100 today might seem like it gets you out of trouble, but you're just delaying the inevitable. Instead of owing your credit card or utility company, you now owe the lender.
Considering that payday lenders charge such high interest rates, it rarely makes sense to use them. Instead of turning to high-interest lenders, get your finances in order so you can avoid the cycle of debt. You may need to borrow money from friends or a credit union until your situation improves, but those options are superior to taking money from a payday lender.
The next time you feel tempted to get a payday loan, stop and think about the negative effects it will have on your life. You can almost always find a better option.
*APR = Annual Percentage Rate.