The Dangers of Payday Loans
Payday loans are seen as an easy solution for sudden financial problems. Despite being helpful in certain circumstances, many individuals advise against applying for this kind of loan. It’s suggested that you should only borrow as a last option if you’re confident with the repayments. A payday loan is a small sum of money that individuals can borrow from a lender. These loans are typically borrowed and repaid over the course of 12 months. Most of the time, this kind of loan is used in emergencies or times of financial stress to help a borrower afford their immediate debts without any troubles. However, if used incorrectly, you could find yourself in further financial debt with more worries. So, while they have undeniable advantages, there are also risks that you should be aware of. Some examples are:
Harm Your Credit Report
Borrowing from a payday lender will generally have a significant impact on your financial records when you’re applying for a payday loan. The hard credit check will deduct points from your credit score after you submit your application and it is reviewed by a lender. Having a credit score on the poorer side will easily impact your ability to borrow a loan in the future. As well as this, it can also influence the likelihood of receiving reduced interest rates from reputable lenders. Therefore, the process of borrowing will become unstable and more expensive in the future. Along with this, lenders for larger sums of money will turn down an individual’s application due to previous financial struggles. However, payday loans only remain on your credit report for six years. Therefore, after this time period, they will no longer be available to any sources checking your report.
The Cycle of Debt
The cycle of debt is one of the largest issues when it comes to borrowing payday loans. Despite being a helpful solution to the financial issues we cannot resolve immediately, they can definitely lead us into a cycle of debt. Research suggests that 75% of payday loan customers took out more than one loan in a year, with the average customer taking out six loans in a year. This is commonly due to missed repayments or further financial struggles due to an abundance of unwanted debt piling up. Perhaps your car has broken down and you need a quick fix, a payday loan could be your best option. However, repaying this bill will put you further in debt to the lender, creating a vicious circle.
The Overall Cost of Payday Loans
Due to the high cost of payday loans, we advise only using them in extreme circumstances. Due to their high fees, payday loans frequently only provide short term relief from money problems and cause them to recur in the future if borrowed by individuals who are not confident with their repayment abilities. Therefore, you should only think about borrowing this kind of loan if you have a reliable source of income that will enable you to pay it back without any doubt. A payday loan will not be the best solution for you if your income is unstable.