Life is unpredictable. Our circumstances can change without warning and this includes our finances. You may find yourself in a situation where necessary expenditures exceed your income. This is where payday loans seem like the only alternative: you receive money and then pay it back with interest. There are a variety of loans available out there, which includes payday loans.
Payday loans are quick loans of small amounts of cash with short repayment periods and high-interest rates, usually taken to cover essential expenses like rent and food. Since they are so easy to obtain, they are pretty popular, and yet, people tend to make certain mistakes that eventually lead to bankruptcy. What exactly are these mistakes? We will look at precisely that in the following article.
Let’s dive in.
1. Being Too Hasty
Since payday loans are so easy to get, many people make the mistake of getting them without realizing what they are getting into. They usually go into it thinking they can get money now and repay it with their next paycheck (pay stubs online) before the heavy interest rate kicks in. However, circumstances can be very uncertain, and it is only natural that some people will not be able to it pay back that soon. As a result, they fall prey to short repayment periods and significant interest rates.
If they cannot pay, they will have to get an extension, which means even more fees and interest rates. Eventually, this can lead to bankruptcy. Therefore, you must consider your circumstances before getting a payday loan. It is vital that you also look at the loan terms in detail and figure out how exactly you will be able to pay it back. Payday loans can be a good option only if you are smart and calculated about it.
2. Using Them For Recurring Expenses
Payday loans are okay for unexpected expenses, like a health or family emergency. However, using them for recurring fees is a mistake many people make. Regular payments include monthly electricity bills, grocery lists, and rent. You will have to pay these costs at a fixed date throughout the year. If you use payday loans to pay for these expenses, you are paying a more considerable amount monthly than you would otherwise. This is because payday loans have hefty interest rates that you will also have to pay.
If you use payday loans for recurring expenses, you are not budgeting properly or not saving enough to cover your monthly expenses. Therefore, it is best to avoid payday loans for recurring expenses as your costs will ramp up monthly and lead to higher chances of bankruptcy.
3. Getting Stuck in a Cycle of Debt
The fact is that most payday loan lenders design the loans in such a way that they can get borrowers stuck in a cycle of debt. This cycle allows lenders to ramp up their profits from just one loan. Typically, they target salaried employees from poor neighborhoods who barely get by. Such borrowers get into loans without realizing the high-interest rates, and lenders count on this. For example, a lender might say that borrowers must pay 15 dollars for every 100 dollars without realizing that extra fees are added after a specific period.
As a result, borrowers get stuck in a cycle of debt where their costs constantly pile on until they can’t afford to pay it back. Eventually, this can lead to bankruptcy if the borrower cannot break free of the loan. Therefore, borrowers must ensure they understand all these terms before the debt cycle begins.
To sum up
Payday loans can be an excellent way to take care of unexpected expenses, but they can also lead to a bad credit rating, wage garnishments, and even bankruptcy. These loans typically have very high-interest rates and short repayment periods, making them challenging to pay back. Many people don’t realize this and make the common mistake of taking out these loans without understanding the terms. Another mistake people make is using them for recurring expenses, which might make sense in the short term, but leads to higher costs in the long term. After all, it is costlier to pay back the loan than to pay the expenses. Finally, payday loans can be predatory, resulting in borrowers getting stuck in a debt cycle if they are not careful and do not pay back the amount as soon as possible.
We hope this article has been insightful and has helped you understand the 3 payday loan mistakes to avoid so that you don’t become bankrupt. Thank you for reading!
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