From the outside, payday loans sound like a pretty good deal. You borrow a small sum of money to hold you over until your next paycheck, and you give it back in a few weeks. There is no credit check, and they are quick and easy. Typically, a payday lender will take a check from the borrower for the amount of the loan plus the fees associated with the loan. Other times, a payday lender will require access to your bank account so that they can withdraw funds as contracted. However, they are not as dreamy as they sound. Payday lenders make a lot of money trapping people in debt, charging interest rates as high as 780% APR. Google has even banned all advertisements for payday loans due to their unaffordable terms and conditions. Other names for payday loans include “cash advance loans” “post-dated check loans” and “deferred deposit check loans.” Read on for reasons why you should avoid payday loans.
Interest Fees are Astronomical
As stated above, interest rates for payday loans can be as high as 780% APR (most cost about 400% APR). On average, loans are for two weeks, charging a flat rate fee of $15 or $30 for every $100 borrowed (15 to 30%!). On top of that, they charge about 400% APR in interest for the term. Compare that to $10 or 5% (whichever is greater) fee on a cash advance, with an APR of 24.99%.
Payday Loans Create a Vicious Cycle
According to the Consumer Financial Protection Bureau, 80% of payday loans are followed by an additional loan in less than 2 weeks. Many people take out a payday loan but are not able to pay it off in time, causing them to take out another short term loan that they cannot afford. This cycle continues until the individual is swimming in debt that they will never be able to pay off.
Some Require Access to Your Bank Account
Some payday lenders offer to take the money right out of your bank account, so that you don’t even need to worry about remembering to pay off the loan. Unfortunately, if you don’t have the money in your account, you will have to pay an overdraft fee when they try to withdraw, and when you do get money in your account, find it suddenly gone. Dishonest payday lenders may also deposit money into your account that you did not take out a loan for, and make withdrawals that are unauthorized.