Risks associated with payday lenders
Payday loan, also known as cash advances, are short term loans that are to be repaid by the time you get your next paycheque. These types of loans are increasing in popularity, for a number of reasons:
- Convenience
- Simple qualifying process
- Easy to access
- Fast turnaround times
If there is so much to love about payday loans, surely there must be some things that work against this type of loan offering.
So what are some of the risks associated with payday lenders?
Borrowing is expensive
Interest rates are nearly always higher when it comes to payday loans. High interest rates are seen to be justified to address the additional risks associated with this type of lending. Individuals who apply for payday loans may typically encounter high interest rates from payday lenders due to being considered a high risk.
May lead to a debt cycle trap
Payday loans are reliant on future income, so as soon as you have received your next paycheque, payday lenders expect repayment of the loan on your part. This may leave you out-of-pocket and needing more help.
Rolling over of the loan often leads top people having to take out another payday loan to pay off the first payday loan. This may ultimately lead you to becoming trapped in a debt cycle.
Payday loans don’t solve any underlying problems
Accumulating more debt doesn’t really encourage the changing of financial habits. Paydays loans offer a temporary solution, but this doesn’t truly solve your debt problems. If you’re in the habit of borrowing money to make it through to the end of the month, you may be living beyond your means and payday lenders may not be the ideal solution.
What are the alternatives to payday loans?
- Credit union loans
- Small bank loans
- Advances from employers
- Borrowing from family and friends
- Crowdfunding
