Payday Loans Debt Consolidation

How Payday Advance Loans Become A Vicious Circle Of Debts?

Though there seem to be many lucrative features that have to offer, there are several negative aspects as well that you must take into your careful consideration before you decide to borrow money using these lending programs. There are uncountable instances where consumers are getting into a serious debt trap because of these loans. Many people have become bankrupt because of this. You may be wondering if these loans are supposed to help people in financial needs, how come they become a nightmare for most of the borrowers. Following is a brief rundown on how it happens.

How It Works?

First, you need to have a clear idea on what these payday advance loans are and how they work. These are very small amount of loans (with upper ceiling of $500 or sometimes up to $1000) that are given for a very short period of time. The due date in most cases is the payday – the date in the next month when you get your monthly salary check or get your salary directly credited into your bank account. On this date, either the lender debits the due amount of the loan (with interest) directly from your account (if you have authorized them for that) or cashes the check (if you have given a postdated check at the time of loan approval).

Automatic Renewal Of Loan

The provision of automatic renewal of payday advance loans is the major reason how a small amount of loan turns into a viscous circle of debt within a few months. Your loan is likely to be renewed automatically if you do not repay the due amount in time. Initially, lenders provide a one-month extension, but if you fail to make the repayment again, the loan term is extended for another one month, and sometimes it keeps rolling over and over again until you either repay the same or go bankrupt. When these loans are renewed, you become liable to pay additional interest for another one month along with a hefty amount of penalty charges.

The Real Culprit Is The High (Huge) Rate Of Interest

The worst thing about payday advance loans is that they charge a huge rate of interest, which is generally no less than 150% and can go up to 300% or even more. However, since the initial repayment period is very small (just a couple of months), the actual amount of interest is often something that most borrowers are willing to pay. But, once the loan term is extended, the amount of interest starts adding up very fast. For example, if you take the loan on 21st April and the due date is 5th May, you are initially liable to pay interest for 15 days only. If the loan amount is $1000 and the rate of interest is 300%, the actual interest due for 15 days amounts to around $123. It means, on 6th May, you will have to repay $1,123. If you fail to do so and get the loan extended for one more month, you will have to pay additional interest @ 300% on the new principal amount, which is $1,123. After 30 days, the amount outstanding will become $1403.75 (1123 + 280.75). Add to this amount a hefty penalty that varies from one lender to another, but generally amounts to around $100. As you see, if you opt for just one-month extension, the actual loan amount becomes 1.5 times bigger. If you calculate, you will find that another one-month extension can make the actual outstanding loan to as high as $2,000 (just double). You can imagine how can affect your life.

Overall, payday advance loans are very risky lending programs for the borrowers. You are advised to build emergency funds to meet your urgent unexpected financial requirements. And, if you must borrow money, you are recommended to look out for other alternatives.


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