7 Reasons You Should Never Take out a Payday Loan ...

Have you ever been tempted to take out a payday loan? These short-term loans seem like a perfect solution to a temporary cash-flow problem. You simply apply for a loan to give you some quick cash until your salary hits your bank account, at which point you can pay the loan off. That's the theory. In practice, however, payday loans are nearly always a serious mistake that can make your financial problems far worse. Here are the reasons why you should never take out a payday loan …

1. High Interest

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One of the main reasons to avoid taking out a payday loan is the incredibly high interest; these high rates are charged because of the risk to the company that you may default, the cost to the company, and because the checks made on would-be borrowers are much less than on conventional loans. The APR on a payday loan may be over 1000% APR. Ok, so the idea is to pay it off quickly, but if for some reason you are unable to do so, charges will very quickly stack up.

2. Everyday Living Costs

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If you need a payday loan to pay your regular expenses, then you're in trouble. You might think that it's only a one-off to get you through a short-term financial problem, but the best method is to always have enough savings to cover any emergency needs. Don't let yourself get to the stage where you need a payday loan.

3. Getting into a Cycle of Borrowing

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According to the Center for Responsible Lending, a massive 76% of loans are taken out to pay off other loans. If you have trouble paying off your loan, you then take out another loan to pay it off. But if you can't pay off one loan, you won't be able to pay off another. So you then get trapped into a cycle of borrowing, constantly worrying about payments and never being able to settle the loan for good.

4. The Loan Can Multiply

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A payday loan can be cheaper than overdraft fees - but only if you pay back the full amount quickly. Interest and fees will mean that your small loan becomes a lot bigger if you have problems paying the money back. Fees are added on if you miss a payment - and within a few months you will owe several times the original loan.

5. Avoiding the Real Issue

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We all have unexpected emergencies crop up. But if you get into a situation where you need a payday loan, you have a serious cash-flow problem. Chances are that your income isn't sufficient to meet your outgoings. So taking out a payday loan avoids the real issue: that you need to sort out your financial problems, earn more or spend less.

6. Affects Your Credit Rating

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Even if you pay back your loan promptly, the mere fact that you have taken out a payday loan will not look good to future lenders. If you have needed a short-term loan, it suggests that you are either irresponsible with money or that you could be a poor risk on paying back credit.

7. Better Alternatives

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Finally, there may be better alternatives to solving a short-term cash-flow problem. You could speak to your employer and ask if they can give you an advance on your salary. Borrowing from a friend or relative will also avoid the interest and charges - but you MUST pay them back on time.

Lenders offering payday loans are very common these days, but this shows that they are willing to capitalise on people's desperation. Make sure that you are never in a situation where you need this kind of loan. How would you get out of a financial hole?

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