Payday loans generally tags along a very evident problem which is the inflated interest rates. Payday loan fees can range from within $10 to $30 for per $100 borrowed. This generally calculates to an interest rate between 261%-782% annually and they have other less evident perils as well.
Payday Loans Can Be Insanely Exorbitant:
Even the most costly credit cards you possess won’t be charging you anything more than 28 to 36 percent at any given time. But a single payday loan can cost you up to 10 times more than that. For example if you take a payday loan of a mere $15 for 10 days, the interest percentage will be something around 400% annually. In order to capture the market for these kind of loans, the payday lenders generally reside in shady localities where the general population won’t be qualifying for any bank loans. It seems like easy way of getting a loan but it has its price, which accounts for the extremely high interest rates.
The Renewal Fees:
If a borrower defaults while paying back the loan on time, the lenders force them to renew the previously active loan or even sometimes pushing them to opt for a new one in worst cases. This traps them in a loop where though they toil their whole day to pay off the loans, the owed amount never ceases. A borrower who takes an initial loan of $400 at $60 interest keeps renewing the initial loan at every two weeks interval for a four month stretch and ends up paying almost $480 as interest, however the original $400 remains unpaid.
The Unavoidable Loop Of Debt:
Some famous lending houses who operate on a short period basis try their best to prevent this cycle of debt by creating and maintaining a detailed database of borrowers. It has been seen by following the trends that 76% of the bad credit payday loans are the result of the attempt of paying off old loans. It has also been found out in the reports of a non-profit organization that on average the borrower continues to pay the debts for almost 6 months though many tries to pay it off by 2 to 3 weeks. The greatest disadvantage of the bad credit payday loans is that these loans can’t be paid gradually over a period of time, like that of in the case of car loans or mortgages on homes but the borrower needs to pay up the whole amount upfront, including the principal and the interest within two weeks. In most of the cases, the borrowers find the lump sum amount to be much more than their expected budget and ultimately falter while handling such huge amounts. So they ultimately resort to renewing their loans or opting out for a new one. Consumer Finance Protection Bureau stated out in a report that four out five payday loans end up as a bad credit payday loan.
Ideally, a lender who lends out payday loans should not have a problem with debt collection, as it means taking out a few bucks out of the checking amount. But the problem arises because in most cases the accounts remain empty which means the lender gets stranded with basically nothing and the borrower gets penalized by a high bank charge. Though the lender doesn’t gives up that easily and continues with his attempts of collecting the money, sometimes getting a bit more liberal enough to break the entire amount into small installments so that the payments get more likely to happen. If the payments still don’t start coming, the lenders may start running after your life and harassing you over phone or physically and even may send legal letters and sue you for non-payment of the debt. Once this happens, the borrower may not have much of an option as the collection agencies will come and sell off your stuff to clear of the debt for every penny. Also, losing such a case in court may lead to seizure of all your assets and scraping of wages.
The Ever Increasing Growth Of Debt Rates:
The thing about the rates of the debts are that they never slow down , rather keeps on increasing with time and you may end up paying about ten times the original rate that was decided at the time of the borrowing. It always starts with one small mistake and before you realize, the debts gets tripled or even quadrupled in a span of just a year and can torment you for a lifetime.
Impact Of Credit:
Payday lenders doesn’t check your finances and credits like a bank or a financial institution before lending out loans as it is not very cost effective to run a detailed credit check on every borrower for issuing trivial amounts for very short tenures. But in case of a defaulter the credit department can track it back even if doesn’t get reported thus hampering your credit scores which becomes a daunting task to improve again.
Bad Credit Payday Loans are worst and one should explore other alternatives before taking a payday loan because honestly it makes any alternatives look good. Any other method of debts is advisable, though it should be kept in mind that you must not become dependent on these.