Payday loans can be a tempting solution when you're in a financial bind, but they can also have serious consequences if you don't pay them back on time. Defaulting on a payday loan can lead to bank overdraft fees, collection calls, damage to your credit score, a day in court, and even a garnishment of your paycheck. Payday loans are considered a predatory type of loan because of their high costs and the potential to trap users in a debt cycle. Payday loans are designed to catch you in a debt cycle.
When an emergency arises and you have poor credit and no savings, it may seem like you have no other option. But taking out a payday loan can have negative effects on your credit, savings, and even take you to court. Most payday lenders require you to write a post-dated check before issuing the loan. This check will be deposited on your next payday.
The problem with this type of loan is that you often have to be a member of the credit union for at least one month before applying for it. Some states offer lower interest payday loans that can be paid in installments and reported to credit bureaus. However, since lenders don't check your credit score when deciding whether or not to give you a loan, many borrowers find themselves unable to repay their debt within the repayment term. It can be tempting to fill out a five-minute application for quick cash, but this could lead to more problems down the road.
Personal loans have much lower interest rates than predatory payday loans and continue to accrue interest over time. According to the Consumer Financial Protection Bureau, simply applying for a payday loan won't hurt your credit. Payday loans are often used instead of emergency savings accounts, but they are also used for regular living expenses. Payday loans are harder to repay than traditional loans because the lender did not verify your ability to repay before lending you money. To gain access to quick cash advances, borrowers often need to grant the payday loan lender access to their bank account. Payday lenders are aware that the likelihood of repayment decreases with the size of the loan. The two most common reasons people fall into the payday loan trap are bad credit and lack of savings.
While it may seem like an easy solution in the short-term, it's important to consider all of the potential consequences before taking out a payday loan.
