Five Reasons to Avoid Instant Payday Loans
Avoiding Instant Payday Loans is a Good Idea. Here’s Why.
It might be easy to think that instant payday loans are a good idea – especially if you find yourself in a financial emergency.
But it’s vital that you refrain from the temptation.
Although it might not feel like it, by avoiding payday loans, you’ll be in a better financial position in the long run.
However, the payday loan industry is still one of the most profitable.
Because of the instantaneity of them and the fact that you can now get them online.
Approved within a few hours, typically with no credit check, this fast cash will seemingly solve all your issues.
Despite this, you need to understand all of the reasons why you should avoid them.
Before getting into the five top reasons why you should refrain from them, here’s a brief guide into what they are and how they work.
What Are Payday Loans?
A payday loan says what it does on the tin.
A short-term loan, the concept of them is very simple – you borrow the amount of cash that you need with added interest, and you repay the amount when you can.
Your ability to pay is determined when the payday lenders verify your bank checking account and income.
If you manage to pay it back on time and accrue little interest, then the loan won’t cause too much of a significant dent in your finances.
However, if you miss the payment date or fall into a dangerous debt repeat cycle, then it can be a very costly mistake.
How Do They Work?
The moment that your loan has been approved by the lender, the funds will be deposited into your bank account.
Although this is simple enough, there’s another part of the process that people don’t realize.
Once this money is deposited, you’ll be required to write a postdated check in payment stating both the loan amount and the interest that will be added to it.
This is done as a way for the lender to know that they will be paid back by a certain date – and if you miss it, they know exactly how many days it’s overdue.
This is usually considered to be a compromise, as lenders won’t look at credit history.
Although payday loans might seem like a fast and convenient way to get money into your account, it’s also a one-way ticket to financial destruction if you’re not careful.
So if you’re considering getting payday loans, take a moment to look at the main reasons to avoid instant payday loans.
The Top Five Reasons To Avoid Instant Payday Loans
The Inevitable Debt Repeat Cycle
Although some reputable short-term lending operators try to prevent this from happening and people start the process off optimistically, it can lead to an inevitable debt repeat cycle.
With a significant percentage of people using payday loans as a way of paying off old payday loans, this dangerous activity wreaks havoc on your future finances.
Because by entering into a debt repeat cycle, you’ll be in debt for much longer than you initially intended.
This, paired with the added interest on top of the money that you borrowed, means that you could continuously take out more and more loans to cover them.
For example, if you had to acquire cash fast for an emergency and you don’t have any money within your debt account/your credit card is not an option, you could turn to a payday loan.
Although it comes with added interest, you’ll do what you can to get the money so that you can successfully foot the emergency bill.
However, when it comes to payday and you realize that you don’t have enough to cover the payday loan along with your other monthly bills, you could look to either extend the loan or take out another one.
As this repetitive cycle continues, your debt rapidly gets worse and worse.
Payday loans come with a long term price – in the form of interest rates and potential high fees.
And if you make a habit out of taking them out, then you could be in an unfavorable situation.
Which is why it’s a good idea to avoid them and explore your other options first.
High Interest Rates
Despite the fact that many payday lenders were forced to lower their interest fees and make terms less strict in 2016, the interest rates can still be very dangerous when added to the initial loan amount.
They also tend to be higher than that of credit cards and personal loans – something that many people don’t realize when they are first considering taking one out.
And because of these high interest rates, debt starts to grow quicker and quicker.
Soon, you’ll have to pay two, three or even ten times more than you originally borrowed.
For example, say you took out a $200 payday loan, the interest on top of this could be $10-15 (in Ontario, interest rates were lowered to $15 per $100 in 2017).
Then, when the payback date came, you’d have had to pay an extra $30 in interest.
Although they might seem like a sensible short-term fix, the reality of them can make them difficult for many borrowers to pay.
Which is why you should try and find a better alternative or ways that you can boost your cash flow.
Access To Your Bank Account
Another key reason why you should avoid payday loans is that many payday loan companies request direct access to your bank account so that they can take the money that you owe out of it.
This means that you’ll have little control of your finances when they automatically take it out, leaving you with a small amount of cash (or none at all) to pay off your basic living expenses.
Unlike writing them a check or having the freedom to pay them on your own accord, this restriction could lead to you going into your overdraft and accruing overdraft fees.
An unfavorable factor of the payday loans, it could lead you to seek alternative ways of paying back your loan or short term solutions that only worsen the situation.
The Additional Fees
Not only do you need to consider the interest rates that are applied to the loan, but you also need to look into what fees are put on top of the initial amount if you have to extend it as there is often a quick turnaround time.
Of course, the other option is to default on the loan – however, by doing this, you’ll run the risk of the loan being sent off to a collections company.
If you opt to extend the loan, then the payday company typically assesses an appropriate fee and adds it to your outstanding balance.
A renewal fee that differs on a case by case basis, you could look to pay an extra $100 or more, depending on the payday company.
Although this might not initially seem like a lot on top of your initial loan, if when the loan is due you still can’t pay it, you’ll be in a sticky situation.
A debt that’s escalating quickly due to the initial loan amount, interest rate and additional fees, it will become more and more difficult over time to pay it off in full.
This will then result in the aforementioned debt cycle.
The Effect on Your Credit Record
Another key reason why you should avoid payday loans is that it can affect your credit record.
While they don’t often require a good credit history to obtain them, what they can do to your credit record could affect your future ability to borrow.
How? Well if you don’t meet the repayment date or start to extend the payments more and more, the bigger the impact on your credit record.
Some lenders could report your missed payment to credit agencies, which directly affects your ability to apply for credit cards in the future.
If you find that you’re strapped for cash, see if there is an alternative way that you can stretch your finances until the next payday.
For example, if you have bills that you’re worried you can’t pay, you could either ask the company if they would extend your payment due date or allow you to pay it off in more manageable chunks.
If you have a credit card with a positive balance on it, you could use this instead of having to take out a payday loan.
Of course with this option, you’ll have to pay a fee as well as interest for taking it out.
Also, you’ll have to repay your credit bill in time, otherwise the interest rates will continue to rise as time goes on.
Another option is to ask a friend or family member if you could borrow some money from them to cover your bills/any emergency funds.
Although this isn’t often an option that people like to take, it will ensure that you get the money when you need it and that you can agree to pay them back in a more timely manner with less pressure of a firm deadline.
If you don’t want to do this, then an alternative affordable way to get cash is to ask your employer if there is any way that they could give you an advance on your paycheque.
Although this isn’t always a given, some employers can be flexible with this and it will avoid you having to apply for an instant payday loan, making it more worth it in the long term.
Assuming that none of these options fit or you don’t want to go for them for any reason, then you need to start looking at other ways that you can acquire funds.
For example, you could look at your monthly budget and try to decrease your spending.
By doing this, you’ll be able to save money and put it towards things when you need to.
The simplest of changes, whether it be stopping subscription services, decreasing the amount of takeouts you get, etc. will make a huge difference to your bank balance.
As well as budgeting you could consider boosting your monthly income by taking on more hours at work.
Helping you to pay off your payday loan or to not get in a bad financial situation in the first place, you’ll appreciate the healthy bank balance that you’ll get from it.
Although it might not be the most tempting way to earn more – especially if you already work long hours, the amount you can save makes it a great alternative.
You don’t want to be made bankrupt or be heavily in debt due to falling into a payday loan cycle.
An unpleasant experience for anyone, the substantial risks that come with them, along with the harassment from some payday loan companies make it a situation that you’ll want to avoid.
By relying on payday loans, you’ll only facilitate an unhealthy financial behavior that you’ll come to regret.
A temporary short-term fix that leads to a long-term financial issue, acquiring one will only make it worse for you in the future.
A type of borrowing that’s harmful as the more you’re accustomed to it, the less likely you are to properly manage your finances, it’s essential that you try not to opt for it – no matter how convenient and easy it might be to apply for them.
Getting out of the payday loan cycle takes planning and dedication and won’t come easily.
So to ensure that you have financial freedom, it’s therefore vital to not only budget each month but to have a firm hold on your finances from the get-go.
Are you looking for debt relief services?
If you’ve opted for a payday loan and are looking for bankruptcy experts in Canada then look no further than Bankruptcy Canada.
Helping people to get a fresh financial start since 1999, we’re your first port of call for debt relief services.
If you want to find out more about what we can do for you, contact one of our local and licensed trustees today on (877) 879-4770.