Payday Loan Debt: How You Can Avoid The Pitfalls
One of the most insidious financial traps a consumer can fall into is called the payday loan
. The concept sounds good. People living paycheck to paycheck sometimes need extra cash, and may not have credit available. The loan store will provide that money on a short-term basis. The problem is that a payday loan debt won't necessarily solve any long-term financial problems, and quite often makes things much worse.
How is that possible? This kind of loan is sometimes taken out because there is no food or rent money left, and the next payroll check is not for several days. A payday lender will agree to give the money, usually for a period of two weeks only. The problem is that an ongoing financial crisis usually is not improved after such a short interval, and may actually get worse. During the two weeks of the loan, interest has been accruing at a phenomenal rate.
Although illegal in around 13 states, payday loans are big business. The lender usually charges between 15% and 30% interest on the full amount. If the loan were actually being issued on a yearly instead of weekly period, the actual interest rate would be from 390 to 780%, doubling the amount borrowed several times over. At the time the loan is granted, borrowers present a post-dated check for the full amount plus interest, with the idea that it will be used to pay back the lender after two weeks.
At the end of the two-week loan period the lender will cash the check. Unfortunately, there very likely won't be enough funds in the checking account to cover such a check, and now the consumer is faced with fees for bounced checks, in addition to the high interest that will be extended. Sadly, the only way for many people to keep going is to take out a second loan to cover the expenses of the first.
This process often continues to spiral out of control until the original issue is lost in a sea of high-interest debt, seemingly with no way out. These kinds of loans are actually illegal in many states because of the extreme interest they charge, and because they are seen as exploiting profits from low-income people who have few other options. For the person caught up in that situation, often the only way out is a consolidation loan.
These loans come in two basic types. The first consolidates the debts from a a single payday loan, and reduces the interest to a point where payback is practical. The consolidation company works with the lender to eliminate missed payments and sometimes late charges. The original loan is not dissolved, but the amount needed for payback is reduced.
The other kind is actually designed for people with more than one loan outstanding. It operates under the same principles as a debt consolidation loan, but pays off multiple instances of borrowing, leaving only one monthly payment. The loan term is usually longer, and the interest still has to be paid back, even though the rate may be lower. There are several advantages to this kind of loan.
This type of consolidation will block collection agencies from calling, and eliminate late fees. Cleaning up in this manner can actually benefit a credit score if completed in a timely fashion. It will allow a person undergoing financial hardship to adopt and live within a reasonable budget. In reality, however, it is probably better to avoid such payday loan debt altogether. There potential for financial disaster is real, and the overall benefits negligible.
by: Paul Sarwana
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