The term “payday loan” may refer to any type of cash advancement that is among a wide array of short-term, unsecured loans. Payday lenders may offer you cash within a few hours of your application submission. In theory, you will pay off your loan with the proceeds of your next paycheck. This type of loan is typically used to pay off expenses in the short term.
For example, you may, at some point, find you have a flat tire and can’t afford to have your car fixed. Payday loans, however, are accompanied by exorbitantly high interest rates. These interest rates are much higher than the interest rates banks would normally charge. Payday loans, in theory, are a convenient solution to a short-term expense. In practice, your acceptance of a payday loan could be the first step towards getting yourself caught in a debt trap.
People may resort to payday loans because blemishes on their credit reports disqualify them for traditional financing. Payday lenders usually disregard signs of bad credit when offering you a loan. This practice is standard because the loan offeror will assume that you will be eligible to repay the loan when you get your next paycheck. Exorbitant interest rates, however, may trap you in a cycle of repayment that extends after your next paycheck.
While payday loan interest rates vary, a 500 percent APR is not unheard of. By comparison, banks only charge around five to ten percent APR on a typical loan. Besides the concerns surrounding high interest rates, why do payday loans have such a bad reputation, if they are legitimate methods of short-term financing? Many people take issue with the way payday loans are marketed to the average borrower. While there is nothing wrong with short-term lending in theory, people are occasionally desperate for extra cash at a certain time. Payday loans may be marketed in ways that conceal risks, targeting people who aren’t money savvy and who don’t have friends and family to assist them in a financial crisis.
If you can’t pay back the loan at the time of your next paycheck, the term of a payday loan is extended, and interest rates build up as a result. Some people find themselves trapped in a cycle of having to bridge their loan repayment by taking out one short-term loan after another. While some may argue that payday loan centers are upfront about their costs and that borrowers are not forced into such arrangements, it is never a good idea to take out a loan with inflated interest rates.