Payday loans are high-interest, short-term loans and many people believe that it bridges the gap between their paychecks. The advertisements for these payday loans are made in such a way that you can get these loans very quickly just by showing an identification and bank check. But what most borrowers are not aware is that they get stuck in a trap and end up paying more money for an extended period. Payday loans are false solutions to many people’s problem.
How do Payday loans work?
Say for example you need about 100 dollars till your next payday; you can go to these lenders who provide short-term and high-interest loans and provide a post-dated check for the amount of money you want to borrow along with the fees you have to pay to the lender. The fee is calculated based on the percentage of the amount that is borrowed. When your payday comes, the lender cashes your check, and if there is no money in your account then the check bounces back and you again have to pay a fee to the bank. If you extend your loan, then the lender will not cash your check, but you will have to pay an extra fee for extending. Thereby, you will end up in a trap, and you will keep borrowing to pay for each charge.
The dangers of these loans:
The ultimate risks of these loans are that you will get stuck in an endless cycle of getting money and paying them back with high-interest rates. Since you have to pay a huge sum of cash as fees, it can get very difficult for you to pay back the loan amount along with the charges and when you do not pay the money back, the fees and interest rates keep increasing and you will never be able to pay the amount.
Some shocking facts about payday loans:
- The rates that are charged on a payday loan are 35 times more than what they charge on credit card loans and 80 times more than mortgages. If you take $300 as loan and can’t repay it in 2 months, you will end up paying $210 as fees.
- Most borrowers end up paying double or triple the amount they borrowed initially.
- The lenders tend to be more in the areas where poverty is high. They focus mainly on people who have very less income. You will never find a payday loan store in the upper-middle-class suburbs of the city.
- It is recorded that in U.S alone, about 12 million people borrow about $50 billion in a year through these payday loans.
- On a report by the Centre for Responsible Lending in the year, 2006 shows that the borrowers end up paying $793 in interest on a $325 loan.