Disadvantages of Payday Loans

 

While payday loans can be a quick-fix to emergency situations, you would be best served to think long and hard before taking one out. You can find payday loan retail outlets in almost every community across the country. For many people they are a poor solution to cash flow and short-term money problems.

Payday Loans Have High Interest Rates

One of the disadvantages to payday loans is that they charge extremely high interest rates to borrow money. In many cases, interest rates can run between 300 and 900 percent on a short-term loan. This is much higher than any credit card company is allowed to charge and can make for difficulty in getting out of a payday loan. If you find that you are unable to pay back the loan within the short-term terms of the loan, you may find that the interest rate climbs even higher and you will not be able to get out from under it at all.

Little Regulation For Fast Cash Loans

Every state has its own regulations about payday loans, but overall they have very little regulation. One of the few regulations is that they are not able to charge interest rates higher than 36 percent APR to military personnel. This regulation came about because payday loan companies were opening numerous payday loan retail stores near military bases and soldiers and their families were being charged extremely high interest rates for short-term loans. There was concern that this practice could put military personnel in security clearance jeopardy, so the regulation was passed.
There are few federal regulations on retail and online payday loan companies. There are current efforts to change this and to make for more cohesive and strict regulation of the payday loan industry.

Short-Term Solution for Long-Term Problems

One of the unfortunate things that happen with payday loans is that it can be easy to get trapped in the payday loan cycle. Instead of being able to budget your funds to pay bills when they are due and with the money that is available to you when you get your paycheck, it can be very easy to take out a short-term payday loan.
Unfortunately, you pay a high price for this short-term money and you may find that you need to take out payday loans more often because your available funds have been depleted by the high interest and fees that you shelled out for the short-term loan. This becomes a never-ending cycle that gets worse and worse over time.

Alternatives to Payday Loans

Because of the high interest rates that are charged for payday loans, it is often easy to get trapped in the short-term loan cycle. Instead of taking a payday loan, consider using credit cards only for emergencies and paying off the balance as soon as possible. You can do this by making payments at least double the minimum payment amount or by paying off the credit card balance in full every month. Although this is also a short-term loan, it is at a much lower interest rate than those charged by payday loan companies.
Payday loans should be the last resort when you need short-term money immediately. They are poorly regulated and can charge high interest rates to take advantage of people in desperate situations. Consider using alternative funds for emergencies if at all possible and avoid the payday loan trap.