Why Payday Loans Are an Awful Borrowing Choice
According to research, nearly 2 million Canadians take out payday loans each year.
They do so for a variety of reasons, often to cover those household emergencies that arise when least expected, or to manage other debts.
But if you’re thinking about taking out a payday loan to manage your debt or emergency financial problem, think again!
As tempting as it might be to take out a short-term loan, and as tempting as the ads are that payday loan companies put out into the world, you need to know that loans such as these are not recommended.
Here are the reasons why.
#1: Payday Loans Come With High Interest Rates And Expensive Fees
The interest rates on payday loans are often much higher than those associated with credit cards and personal loans and can be as high as 500-600%.
Lenders assess a fee when money is borrowed.
A loan of $100, for example, could have a fee of around $15.
The person would then have to pay back $115 before payday.
A $15 fee might appear like 15% interest, but when you do the maths, it’s equivalent to a 390% annual interest rate, which is 10 times the rate on a typical credit card.
Because of the high fees and interest rates, and because these loans often come with a fast turnaround period, borrowers often struggle to pay them back before payday rolls around again.
They then have two options:
- Default on the loan and run the risk of a collections agency. Or:
- Pay an additional fee to roll over the loan for an additional two weeks.
As you can understand, the level of debt can quickly escalate.
Extra fees are imposed if the loan is defaulted upon, and extra fees are charged if the loan is renewed.
If the loan keeps getting renewed or defaulted upon because the borrower can’t make the payment in time, the fees will continue to escalate.
The borrower can then become caught in a debt trap, especially if they continue to renew or take out other payday loans to manage what they have already borrowed.
If this is something you are already relating to, we can help.
Contact us using the details on our website and talk to us about the debt solutions we can offer you.
#2: Payday Loans Can Facilitate Unhealthy Financial Behaviour
Payday loans are an easy way to get your hand on the cash you need.
If you can’t pay your household bills one month, or if you can’t afford your grocery shop, no problem: Take out a payday loan to cover your expenses.
As we have already discussed, if you are already struggling financially, you might hurt yourself further if you become reliant on payday loans to fix your money problems.
You might also accustom yourself to taking out payday loans as an easy way to pay for your wants or needs, rather than making the effort to save money or to find other ways to manage your financial problems.
You can understand the problem, we’re sure.
To achieve financial freedom, it is imperative that you succumb to healthier behaviour.
Learning how to budget and manage your finances is essential, as is making an effort to save for emergency situations or paying for higher than expected bills.
If you always turn to a payday loan to get you out of trouble, you might become dependant on such loans to rescue you, and you might neglect better saving and spending habits.
And as we have already stressed to you, you will also dig yourself further into debt.
#3: Payday Loans Can Harm Your Credit Rating
If you do get into debt because of the payday loan you have taken out, you will notice the damage to your credit rating.
Because of this, you might struggle to take out a loan from a reputable lender, especially when you’re trying to find a bank or other financial firm with a lower-interest loan for debt consolidation purposes.
You will also find it difficult to qualify for those loans that you might take out for a car, a down payment on a house, or another important purchase.
You will then realize that you should have found an alternative way to manage your financial situation, and you will wish that you had made the effort to receive credit counselling or some other kind of debt help before your credit score worsened.
Alternatives To Payday Loans
You don’t have to rely on a payday loan to get you out of trouble as there are other options.
You could speak to your creditors, for example.
If you can’t make your payment on time, let them know as soon as you can.
Many utility companies set up payment plans with their customers, and some creditors will extend the due date to allow a person more time to pay.
So, call your creditors, whoever they might be, and let them know you’re struggling.
You could also ask your employer for an advance on your paycheque.
Or you might speak to a family member or friend and ask for a short-term loan.
While you might have to swallow your pride with these options, that’s better than taking out a payday loan and potentially worsening your financial situation.
If you have a credit card, you could use part of your balance to get you out of financial trouble.
This is only a temporary fix, however, as while it might be cheaper than taking out a payday loan, you will still incur high interest if you fail to pay back the balance on time.
You might want to take a long hard look at your finances too.
If cutbacks can be made, then make them.
This way, you will have more money to spend the next month, and you will have more money to save for emergency situations.
You could find ways to boost your finances too, perhaps with a second job, overtime at work, or a hobby that could bring in the cash.
You might also sell some of your unwanted items to give you that cash boost.
If you are in debt, for whatever reason, get in touch with us today.
We can talk to you about credit counselling and debt consolidation and can explore some of the debt relief options that might be open to you.
We can also suggest sources of help if you are currently struggling and considering a payday loan to get you out of trouble.
Call us at (877) 879-4770 or fill out our consultation form, and benefit from the help of one of our trustees.