Payday loans, they are an incredibly appealing option for funds that seem a quick fix. However, a payday loan can end up costing you a lot more than you anticipate. The dangers of payday loans are often hidden in snappy advertising and clever marketing. This marketing is specially designed to appeal to the financially vulnerable.
Before you undertake a payday loan, just like any loan, you should do your research. This can help you avoid financial disaster.
What Is A Payday Loan?
A payday loan, also known as a small loan, is an unsecured cash loan up to the value of $2000. These loans can have repayment terms between 16 days to 2 years and attract several fees. They require minimal paperwork and can be approved within a matter of hours.
Their appeal lies in the fact that they are often approved for those with poor financial history who have little or no access to conventional lines of credit. Meaning that financially less savvy individuals are easily captured and locked into expensive small loans.
Marketed as uncomplicated, risk-free emergency fund solutions payday loans are targeted at those who already struggle to save or manage their finances. Contributing to making a bad situation even worse for the borrower.
Payday Loan Costs
Legally, payday lenders cannot charge interest on the amount borrowed. They can, however, charge a number of fees to make up for that. On a payday loan you can expect:
- An establishment fee of up to 20% of the loan principal
- A monthly service fee of up to 4%
- Government fee (most lenders do not leverage this)
- Missed payment/dishonour fees. This applies if you do not have enough funds in your account when a direct debit repayment comes out.
- Default fees. These apply when you fail to make the repayment by the required due date. The penalty for this can be up to double the amount borrowed.
- Recovery expenses. Should your lender engage a debt collector or other legal help to recover the unpaid amount, you will be billed for these services.
- Renewal fees to extend the term of the loan if you have been unable to pay it out
The Dangers Of Payday Loans
The dangers of payday loans lie in the fees and the fine print. As outlined above, the fees can be excessive in comparison to the amount borrowed. With the terms and conditions often convoluted and binding, it can be easy to miss some of the potential dangers.
Even though lenders cannot charge interest, the fees are designed to fill that gap. Payday loan equivalent interest (levied in fees) ranges from 300%-500% annual percentage rate (APR).
These rates sound excessive even before you compare that to the 15%-30% APR on credit cards or 10%-25% rate for a personal loan. Combine this with very short repayment periods and it can become near impossible to stay on top of repayments.
If you already have a low credit score and poor credit health, a payday loan can exacerbate this. Making it harder to resolve your financial situation or plan for a healthy financial future.
Ultimately, the structure of payday loans means that you are destined to remain in a cycle of debt. While they seem appealing in a time of need, they are best avoided at all costs.
What Other Options Are There?
If you find yourself in financial distress and require access to emergency funds, there are better options than payday loans. To avoid the dangers of payday loans, and depending on what you need the funds for, you should consider:
- Negotiating with utility providers and arranging a payment plan
- A personal loan or credit union loan, even with bad credit these loans can still be an option for some
- A low-rate credit card
- Asking friends and family for help
- Ask for an advance from your employer
If you are already trapped in a payday loan after discovering their dangers too late, consider debt consolidation as a way to escape it. Taking out a different loan with better loan terms can help you recover and escape the cycle of debt.
Avoid Payday Loans And Seek Help
Despite the dangers of payday loans, a lender legally cannot lend to you if they do not believe you can repay the debt. Regardless, you should seek other options. Bad Credit Loans, offer zero-judgement support designed to help you recover your finances.
Don’t be tempted by a payday loan, it will cost you significantly more in the long run and the dangers of payday loans well outweigh the benefits. There are alternate loans which can give you the help you need with significantly fewer fees and risks. Call today on 1300 123 328 and find out how they can help you stay out of debt and avoid the dangers of payday loans.