When things like car trouble or unexpected medical expenses occur, you may find yourself in dire need for some extra cash. It is situations like these that make many consumers turn to payday loans for a quick fix. However, there are often serious consequences with payday loans and it is important to understand the dangers that are involved.
According to the latest research data, people who utilize payday loans are 7 times more likely to file for bankruptcy than those people who do not. Even so, there are around 10 million American families who take out payday loans each year.
A report titled “Do Payday Loans Cause Bankruptcy?” was recently published by participants from Vanderbilt Law School and the University of Pennsylvania. According to the data, there is a clear and undeniable link between payday loans and bankruptcy. In fact, those people who are approved for a first-time payday loan experience a 90 percent increase in bankruptcy filing rates.
What is a Payday Loan?
A payday loan is a type of short-term loan. You generally are required to pay back the loan when you receive your next paycheck. Overall, these types of loans are considered to be the worst way of borrowing money, mainly due to their high interest rates. In fact, there are some payday loan companies who charge an interest rate that is equivalent to 1,000 percent.
While borrowing money quickly may appear to be an easy solution on the surface, when you look deeper you find that the fast money comes with a high price attached. According to the Consumer Federation of America, most two-week payday loans are equivalent to annual percentage rates of 390 to 780 percent and the typical charges are $15 to $20 for every $100 that is advanced.
A Vicious Circle
The biggest danger you face with a payday loan is getting stuck in an ugly cycle where you are forced to keep taking them out. Payday loans are designed to create this kind of problem and it starts as soon as you take out the very first loan.
You are no doubt already in a financial crisis when you use the services of a payday loan store and you are required to pay the money back when you receive your next paycheck. Considering paying off the loan will likely use the bulk of your next paycheck, you will probably find yourself short on money again. This leads you to take out another payday loan in order to get by until you are paid again, as there is no limit on the number of times you can get this type of a loan. It ends up being a vicious circle of payday loans, costing you thousands of dollars in interest. For this reason, many people feel they are predatory lenders. In fact, 15 states have outlawed payday loans and additional states are sure to follow.
Another problem with payday loans is the impact they end up having on your credit. It is a common misconception that these loans have no effect on your credit rating. Once you fail to make a timely payment or you are simply unable to pay the loan off, your information is forwarded to a collection agency. You are then reported to the major credit bureaus.
These are just a few of the dangers that you typically face when doing business with a payday loan service. Unfortunately, some people end up being more concerned about paying for emergency expenses than the ultimate cost of the loan that’s being used to pay them. If you are considering a payday loan, do yourself a favor and speak with an experienced bankruptcy lawyer first.
Writer’s Bio: Nikki Seay is a Tennessee-based freelance writer who enjoys creating content that truly makes a difference. She is a full-time writer for BillsBills, Berger&Montague, Apteka Naturel, LivHOME and SeniorTech Daily.