Debt is something that we all experience in life at some stage.
People often split debts into two distinct categories; good and bad debt.
Good debt refers to money you borrow for a good cause.
This can include student loans, paying for a house or even a car.
Whatever the case is, there’s a good chance that it’ll help you further in life.
The second type of debt is bad debt.
This is usually considered anything that you don’t actually need, such as taking out a loan to pay for a new phone or a holiday.
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What’s the problem with payday loans?
Bad debt usually stems from short-term lending products such as payday loans.
These can charge incredibly high-interest rates and can leave you in a cycle of debt.
To pay off these loans, you might have to resort on taking out other loans.
In some cases, a simple payday loan of $1,000 can easily extend over several years and put you in debts of up to $10,000.
According to the Financial Consumer Agency of Canada, a $300 payday loan can result in over $63.00 of interest after just two weeks.
Legislation has helped cap the amount of interest a payday loan can charge you.
For instance, Alberta has lowered the maximum interest to $15 for every $100 borrowed.
This still amounts to a massive annual interest rate, but it’s a step in the right direction to prevent these lenders from taking advantage of vulnerable people.
South Dakota went one step further
In 2016, South Dakotans passed Initiated Measure 21 which placed a hard cap of 36% annual interest on short-term loans.
It won with a landslide 75% support.
Nowadays, payday lenders are virtually extinct in South Dakota due to the new restrictions.
This made short-term payday loans unprofitable.
$10 interest on a $100 per week suddenly dropped to just 75 cents of interest.
They aren’t completely extinct and there are some people that still use payday loans.
However, an equally dangerous alternative has also been gaining popularity; online borrowing.
Are online lenders dangerous too?
While not as bad as payday lenders, online loans still have very high-interest rates compared to regular banks.
Annual interest rates can be well over 30% and they also need to be repaid over a much shorter period.
In addition, they’ll charge expensive fees for missed payments.
Online lenders might also frame their loans to be a better value than most banks.
In reality, they can be just as bad as payday loans and you should be extremely careful of any short-term loans.
Both payday loans and online loans can trap you in an endless cycle of debt.
If you’re worried about debt or are searching for alternatives for lending, don’t hesitate to get in touch with us today for more information.