Payday loans are some of the riskiest loans that you can get if you need cash. In fact, several states have even outlawed them. Regardless, many people still opt for payday loans when they are short on cash. Payday loans do have their place in the world and can be a way to get back on your feet or make ends meet temporarily if you are aware of the dangers. Here are some of the key dangers that you need to be aware of in case you are thinking about getting a payday loan.

Huge Fees

First, most payday loans have pretty hefty fees associated with them. Many lenders charge fees that can add up to $50 or more dollars per loan. Since the average payday loan is only $200 to $500, that is over 10% of the loan value.

Furthermore, since the loan requires a post-dated check in case of non-payment, if the loan isn’t repaid, the borrower can also get in trouble with their own bank due to bounced check fees.

Crazy Interest Rates

Payday loans are also known for their incredibly high interest rates. Since these loans are such short term loans, if you annualize the percentage rate, it can be extremely high. For example, a 10% loan that is for 2 weeks, is actually a 260% loan if the loan is not repaid for a year.

That is why it is so important to repay the loan in full each week. If you draw the loan out for a long time, the interest rate you pay on the small amount borrowed gets to be crazy high! However, it is important to note that interest is not compounded onto a payday loan – the only thing that adds is more fees and interest, not compounding.

The Payday Loan Cycle

The payday loan cycle refers to individuals unable to repay the first payday loan, so they take out another loan to pay off the first one. The New York Times highlighted how Seductively Easy Payday Loans Often Snowball, causing more problems for consumers. This essentially traps borrowers in a cycle of payday loan debt, from which escaping can be difficult because the fees and expenses keep adding onto the principal which keeps rolling over.

Joe Edward
Joe Edward