Some people think that payday loans are the best thing since sliced bread. They use them frequently and sometimes even carry more than one at a time. This may solve an immediate problem but what about the long term impact? People enjoy having this option, but can these loans become a trap?
Getting Caught in the Trap
If you are using payday loans frequently and have more than one at a time, chances are good that you may be caught in the loan recycling trap. What seems easy to handle at first balloons upwards until you cannot repay the loan and just keep renewing it repeatedly.
What It Costs You to Be Caught in the Trap
If you are not careful you will discover that you are using payday loans month after month for years. This can be very bad for your financial life. What begins as a short term, very high interest loan can become an ongoing drain on your wallet. Yes, they do have high interest rates but most people do not care about the interest because it doesn’t look so high. What they see is that they can borrow $100 for a $15 fee. It doesn’t take a rocket scientist to figure out that if you keep renewing this $100 loan with the $15 fee each week for seven cycles you will have paid $105 just in interest and still owe the $100. The $15 interest fee may be at the extra interest high rate of about 360% APR on an annual basis. If you cannot get out of the loan in a few weeks you will be paying two, three or more times what you borrowed. Multiply that for higher loans of $300 or $400 and you are paying about $50 per cycle in interest each time.
How to Get Out of the Trap
If you discover you are having trouble getting out of your loan cycling problem see if there is anyone who can help you out. Check with family, friends or your local banker to see if you can get a small signature loan to cover what you owe. That will give you much lower interest rates of about 10% APR and a long time to repay the loan. If your credit is poor the bank may not want to lend you money or they may require that you use something for collateral. Payday loans do not have collateral behind them; they only have your signed check or ACH form. If you default the whole thing will be treated as a bad check which can cause legal problems.
If you cannot find a loan, then look for more income. Get an additional job or sell something. Do not pawn items or you will have the same problem with high interest and repayments. You can renew the loan for a lesser amount each time and get rid of it that way. As a last resort some payday lenders can offer you a payment plan over several weeks. This may affect your ability to get future payday loans.
Most people enjoy using payday loans. They are fast, easy and convenient but could cost a bundle on a long term basis. As convenient as these loans are, finding more income and cutting expenses are sometimes better options.
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