Why Payday Loans Can be a Dangerous Way to Borrow Money

Wed, Apr 18, 2012

Financial Advice

Payday loans are one of the most dangerous ways to get into debt and many people don’t even realize what they are signing up for. Payday loan companies claim that these loans are to be used in the very short term and paid back before the interest mounts, but in reality, the people that they target are often the kind of people that are not able to make the repayments on time, or have to extend the loan further.

Here are a few reasons why you should try to avoid payday loans as a borrowing tool wherever possible:

  • The interest rate is huge! Yes, they advertise it as a short term loan and claim that the interest rate is not a major factor, but if you miss a payment or extend your payday loan then you’ll soon see that the interest racks up and can balloon the debt to a much larger figure.
  • There are charges and penalties. You have to be careful not to miss payments or get extensions because sometimes there are hidden charges to be added. Not only that, but interest gets added to the charges too and you end up paying interest on more than you actually borrowed.
  • The marketing is misleading. Payday loan company ads and websites always have pictures of happy, smiling young people or a young family. The words they use are meant to make you act on impulse. “Get your money in 10 minutes with no credit check” and other misleading phrases make it sound like it’s not a big deal.
  • They make money when you’re in debt. If you get in debt to a payday loan company, they will continue to add charges and interest and won’t stop, even if you contact them to say you cannot afford the repayments. They do this because once the debt is large enough they can sell it to a debt recovery agency and they still make a profit off your debt.

If you are looking for a way to improve your cash flow that is much more ethical and manageable there are a few ways you can do this. First, you could earn more money by working a second job for a few hours a week. There are job sites online like Elance.com which let you work from home as a writer and you can charge whatever hourly wage you set.

Another excellent way to improve cash flow is by consolidating your debts into one repayment. This takes any loans, credit cards and store cards you have and pays them off with one big loan that you repay instead. Sometimes the loan is slightly longer than you would have paid them off originally but it means the monthly amount can be reduced and this can quite often help with cash flow and avoid getting further into debt.

There are plenty of options to choose from but think very carefully before using payday loans. You rarely hear any negative opinions on them because they are so heavily promoted but dig a little deeper and you’ll find people who have lost everything to them.

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