Payday loans can help you out of a situation where you have an unexpected bill to pay before your next paycheck and don’t have the money to cover it. They can be incredibly useful to help you navigate through unexpected bills such as medical fees or vehicle repairs, but they do come with some risks that you should be aware of. In this guide, we’ve broken down these dangers into three main categories: Credit, Cost and Consequences.
What Are The Dangers Of Payday Loans?
It is important to know that if you fail to meet your payday loan repayment schedule, your credit score can be negatively impacted. A low credit rating can make it more difficult to be accepted for a loan in the future or mean that you can no longer get credit products from traditional resources such as banks. It can also mean that you receive less favorable terms when borrowing money, such as higher interest rates or a shorter loan term.
A payday loan should definitely not be used to repay other loans as this will create a cycle of debt as you will incur high fees that will be detrimental to your current financial situation. Even if you fail to repay your loan on time, it will still continue to gather interest that will likely result in a great deal of unmanageable debt.
The cost of payday loans can also be off putting to potential borrowers. Payday loans offer fast cash and sometimes accept poor credit, so charge a much higher interest rate than other types of loans.
Payday loans can be expensive, which is why they are only ever recommended for unexpected and emergency payments, such as surprise medical bills and vehicle repairs. The high cost of payday loans can trap borrowers in a cycle of debt if they fail to meet their scheduled repayments.
As such, it is important to only apply for a payday loan if you meet the typical requirements for a payday loan including: being over 18 years of age, being a US resident, having a stable income, and having a bank account that the loan can be paid into upon approval from the lender. Payday loans should only be used as a quick fix for people with a stable income, who know that they will be able to make the scheduled repayments.
Aside from having a negative impact on your credit rating making it more difficult to be accepted for loans in the future, there are other severe consequences for defaulting on your payday loan repayments.
If you fail to make repayments, your lender can attempt to reclaim their money via several methods. They could enforce wage garnishment, wherein a portion of your wage is sent straight to your lender; implement lawsuits and take you to court; and enforce debt collection. It is extremely rare, but jail time is also a possibility for defaulting on scheduled payday loan repayments.
Payday loans undoubtedly have benefits for those with unexpected and urgent bills to pay before the next paycheck comes in, but there are also a lot of drawbacks that you need to be aware of before applying for and accepting the terms of a payday loan.
Charlotte is an expert writer with over 10 years of experience in the financial space. Follow her posts for useful advice and interesting facts on key topics such as money, finance and payday loans.