Payday Loans have the reputation for being easy to get, high interest rate loans. Unfortunately, most borrowers only look at these factors. When a customer sees that they can get $100 and pay $15 for the privilege, it doesn’t seem like a lot of money. When you are in need of fast cash, it is east to ignore all the factors that need to be considered when borrowing money. Understanding the risks involved with payday loans, will help you make good financial decisions, while reducing the risks involved in the process.
There are 5 major risks that need to be considered when evaluating whether a pay day loan is the right avenue to meet your financial needs.
- The risk of not being able to pay back the loan on your next payday. In the world today we want things now. There is a sense that we should not need to wait for anything, even the next payday, to get what we want. Since payday loans are easy to get, sometimes easy money is not necessarily good money. I have read several case studies of people who took out payday loans a week before every payday without realizing how habit forming it had become. In each study the borrower paid back the loan at each payday, and then before the next payday arrived, decided they needed more money. At a cost of $15 for each loan, getting paid every two weeks, the cost would be $390 in fees for the year. For the privilege of using your money a week early. Clearly, there was not an emergency each week. Yet getting what we want without having to wait until payday is an easy and expensive habit to get into.To reduce this risk, really consider if you need the money, or just want the money. What is the cost of waiting? If you want a new outfit, the cost of waiting a week is zero. If your power will be cut off, it may be $35. If the cost of waiting is greater than the payday lending fees, then taking out the loan may be the right thing for you to do. But be aware of the trap of easy access, and taking out loan after loan.
- Risk of taking out additional loans, before current loans are paid back. This can create a serious problem. There are many payday lenders willing to give you loans without pulling your credit. Because of this, they are not checking to see if you have other payday loans outstanding. It is your responsibility to manage your payday loans. If you have a loan out, it is never wise to continue to take additional loans out. Even though the money is easy, the paying back can become very difficult. If you aren’t making timely payments wages can be garnished and fees increase overtime. You could end up paying as much in fees as you borrowed.If you find yourself in the situation where you have taken out multiple payday loans and cannot pay them back it is a good idea to seek credit counseling. There are many credit counseling agencies that can help you get a handle on your finances.
- Risk of getting deeper in debt. Often the reason you need a payday loan is because you have no other sources of funding. If credit cards are already maxed out and there is a cycle of consistently needing payday loans it is important to look at how you manage the money you are making. With payday loans, they are meant to be short term financing. To be paid back within a few weeks. If you don’t pay the loan off, then the fees increase and add to the amount of debt you owe. If you are only paying the fees, and not paying down the loan, you can quickly find yourself in a downward credit cycle.The only real way out of this is by establishing a budget and sticking to the budget you have set. It is very important to recognize what is a need versus what is a want. For a few weeks or a few months, cutting out wants can generally get you out of the debt/payday loan cycle. Things like getting your hair and nails done, going out to eat, even taking public transportation instead of driving, can reduce costs, enough to catch your finances up. If that doesn’t work, getting help from charitable agencies or getting a second job for a while may be required. It is important to get help earlier rather than later.
- Risk of high fees and buying into advertisements. Advertisers spend millions of dollars a year to convince consumers that we need certain things. If we have these things we will be prettier, wealthier, smarter, and happier. Lines like, “you deserve it, and you’re worth it,” make us feel we have a right to more material things than we can really afford. Understanding the high fees that come with payday lending can reduce the risk of falling for the belief that we need or deserve things, that are really things we would like to have, but can wait.The only real way to financial freedom is by recognizing that we don’t need as much as we think we do. Our children will adjust even without the newest phone, tablet, or tennis shoes. Often adults sacrifice their own financial well-being to buy things for their children they really don’t need.
- Risk of reduced credit scores. Because the payday loan does not require a credit score, borrowers often don’t recognize that how they manage these loans will affect their credit scores. If the loans are not pay back on time, they will be reported to the credit bureau as an unpaid debt. If the payday lender garnishes wages, this will show up on the credit report as a delinquency.Credit impacts so many other areas besides loans; it is an important risk to consider. Jobs often pull credit. All forms of insurance pull credit and charge more for customers with lower scores. Almost all lenders, and landlords review credit as part of the decision making process. It is important not to borrow more than you can pay back. The impact goes beyond the immediate cash borrowers are seeking.
Taking the time to understand all of the risks, will help borrowers make better financial decisions. Payday loans have a market and meet a need for consumers. Like most things, it can be abused. In this case, abusing the easy access ends up costing the consumer money they may not be able to afford.