Are Payday Loans Worth Repaying?

Payday loans are incredibly risky due to their very high interest rates and charges. Many people find it difficult to pay them off, getting stuck in a continuous cycle of debt.

Payday loans

are bad because of the exorbitant interest rates and charges that leave borrowers stuck in a vicious cycle of financial trouble. Payday loans are designed to trap you in a debt cycle.

When an emergency arises and you have poor credit and no savings, it may seem like you have no other choice. But choosing a payday loan can have serious consequences, negatively affecting your credit, any savings you might have had, and even leading to court proceedings. Payday loans can be very tempting, especially for those who have no cash reserves and a credit history lower than sterling. But be careful, just because a payday lender doesn't seem to care about your creditworthiness doesn't mean borrowing money isn't dangerous.

Payday Loans Can Be Beneficial Under the Right Circumstances. If you have a strong financial history but only need a little extra money to cover an expense, a payday loan could be a great option. However, remember that payday loans carry risks and, if you are not confident in your ability to repay your debt, a payday loan could ruin your credit rating or even land you in court. Is it bad to get a quick payday loan? Yes.

That's because they'll slap you with huge fees. Fast Payday Loans Have a Huge Cost — They Have Significant Interest Rates. Yes, applying for a personal loan means getting more into debt, but it will cost much less than a payday loan. Borrowers, on average, receive 8 to 13 payday loans per year from a single payday store.

Usually these are loan drafts: rollover extensions or back-to-back transaction loans in which the borrower basically pays a fee for not having new money, never pays the principal owed. The typical situation of the borrower is even worse, since borrowers often go to more than one store (1.7 stores on average), so they get from 14 to 22 loans per year. In fact, only one percent (1%) of all payday loans go to one-time emergency borrowers who repay their loan within two weeks and don't borrow again in a year. Payday lenders are well aware that the likelihood of repayment decreases with the size of the loan.

But since payday loans trap you in a cycle from which it is almost impossible to get out of, it's worth striving for an alternative solution. Instead of taking out a payday loan, consider borrowing money needed to repay the loan from friends or family, or freeing up funds by postponing repayment of a less pressing debt. By comparison, the credit card default rate is also about 6%, but the interest rate on a credit card rarely exceeds 29% (unlike payday loans that typically charge an APR of 400% or more). Pew's analysis of the initial proposal recommends a stronger capacity to pay standard in the CFPB rule and clearer guidelines to avoid excessive loan durations, unaffordable payments, and lender abuse in accessing checking accounts.

If you can't repay the loan on time, your credit could be heavily impacted and your debt could eventually be sent to collections. The only reason to take out the first payday loan was that they didn't have the money for an emergency need. According to Pew Charitable Trust study, 75% of Americans favor greater regulation of payday loans. Even if your credit wasn't good before the payday loan default, a new collection action is almost certain to make it worse.

If you have fair credit, expect to pay more, although rates may still be lower than with a payday loan and payment terms can help you avoid high monthly payments.

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