If you find yourself in a bind, like being late with your rent to the point of eviction or facing a medical emergency, you might be considering taking out a payday loan if you don’t have any savings. Payday loans are a form of predatory lending that is likely to leave you financially worse off than you were before. If you lack access to a credit card or personal loan through traditional means like a bank or credit union, you may find yourself taking out a payday loan. However, this is not a good course of action.
Why Do Payday Loans Make Your Financial Situation Worse?
Payday loans are very short-term. They must be paid back immediately, like when you get your next paycheck, hence their name. The interest on payday loans is somehow exempt from usury laws and carries anywhere from 300-800% APR when the fees are annualized.
Because of the high interest and short term, it’s very easy for your debt to snowball if something happens, such as losing your job, before the term is up. 32 states do not cap interest rates on payday lenders or regulate them at all which can make this type of loan impossible to pay off compared to the fixed rate you could get at a bank or the more affordable rates a credit card cash advance would offer.
Payday Loans Are Not Heavily Regulated
Payday lenders frequently break the law. Depending on the state they operate in, they are typically masked as “credit service organizations” or other money service businesses with vague names that aren’t considered banks. This is so that the lenders can get around loan balance authorizations and interest rates imposed by the law. Fraud is even more rampant with online payday loan services.
Violation of credit laws is everyday business for payday lenders, including sneaking in voluntary wage assignment causes into the payday loan contract’s fine print. This gives them the power to siphon money from your bank account far beyond what you legally owe.
You Could Lose Your Bank Account
Payday loans worsen your financial situation in a multitude of ways. But if a lender tries to get payment from your bank account and you have an insufficient balance, your bank can assess overdraft fees and damage your credit rating.
Worse yet, the bank may close your account if this habit repeats itself. It is very hard to open a bank account again if the bank sees that you have a history of overdrafts related to payday loans.
By not having access to a bank account, this only increases your reliance on alternative financial services like check-cashing services and compounding the payday loan problem because the bank doesn’t want to take risks.
Payday loans are a predatory form of lending meant to take advantage of the most vulnerable among us. If you are in financial straits, try to sell some possessions or borrow money from a friend or family member instead of falling into the payday loan trap.