American life runs on credit. It is often difficult to avoid loans and credits altogether. We need loans for homes and cars and even for buying groceries. It is difficult, thus, to say that we can have a truly credit-free life. If managed properly, these credits can help us achieve all our goals and live a fulfilled life.
However, there is one kind of loan you should never get. These loans can easily cripple your finances for the next 6 months at least. If you already have a financial problem, this kind of loan will only aggravate your troubles. Let’s understand it in detail.
Payday loan- credit from hell
If you don’t care about your finances, a payday loan is right for you. This is a short-term loan that is known to ruin the lives of many. Though it looks simple and useful on the surface, it is shadier inside. The basic concept behind a payday loan is simple- if your current paycheck is unable to meet your requirements, get a small term payday loan. As soon as you receive your next paycheck, you pay off the loan.
In reality, things are much more complex. These debts are available to anyone. There are no credit checks and no security are needed by the lenders. All you do is get a loan for about 2 weeks from the lender and deposit a check with them, which will be encased on a certain day, most probably the day when your paycheck arrives. These loans are always small, a few hundred dollars and the rates of interest are usually high.
What happens when you take this credit?
You could be paying $20 for every $100 you borrow. In fact, APRs of 400% are quite common with these loans. There are horror stories of these loans getting APRs of 1000% or even more. Here is how it works.
You have always had problems with your finances but this time, you have issues making ends meet. You borrow $500 from a payday loan provider. He charges you $10 on every $100. You have to return this money to him in 2 weeks. The total payable will be $550.
Now, if you were already struggling with your finances, it is highly likely that you will struggle to pay this $550 as well. There are only two viable situations that arise out of here. First, you pay $550 from your paycheck and struggle with money again. So, you take another payday loan and this cycle goes on and on.
Second, you ask your lender for a rollover (it is regulated in some states. At some places, rollovers are not allowed while in others, there is a cap on renewal). In this case, the fee keeps piling up, landing you in another financial mess.
Take our advice- stay away from payday loans. If you ever face financial problems, try cutting the corners instead of diving deeper into debt. One payday loan will be enough to disrupt all your financial goals in just a few days. Be careful and plan your finances in advance.