Posts Tagged ‘payday loan debt trap’

How Does A ‘Loan To Pay Day’ Trap Borrowers Into A Vicious Debt Cycle?

Loan to pay day is also commonly knows as various other terms, such as payday loans, payday cash advances and others. For those, who are in need of urgent cash because they are going through certain unexpected financial hardship, these types of loans often prove to be highly tempting. The reasons are obvious – these loans offer quick approval and instant cash, which is what people in such situations want. The approval rate is very high – over 99% of applications get approved. But, it is very important for you to keep in mind that no matter how tempting these loans may sound, borrowing these loans is never a wise decision because it can trap you into a vicious cycle of debts.

Since a loan to payday is a highly lucrative option for people in urgent need of money, they often do not even read the terms and conditions explained in the loan contract. This can prove to be very costly for you, as you might get many unpleasant and horrible surprises at a later stage. Following is a brief rundown on how it works and why these loans are also termed as predatory lending programs.

Hidden Charges (In Addition To Interest Charges)

Payday lenders often advertise such loans at a low interest rate, but they do not mention anything in their advertisement about various other charges that also apply. These charges are explained in loan contract. If you do not read the fine prints thoroughly, you will be shocked to see those hidden charges later. For example, if you apply for a $500 loan and your application gets approved, your lender may deduct up to $50 in terms of processing and other charges and you might actually get $450 only. But, the interest charges will apply on $500.

The Advertised Interest Charges Can Be Deceptive

Payday lenders never mention exact rates (in percentage per annum) on a loan to payday in their advertisements. Instead, they mention only the amount of interest. For example, they may say that they charge only $30 as interest. This again is a deceptive figure because they charge that much amount of interest on every $100 of loan to payday. If you are borrowing a $500 loan, you will have to pay $150 as interest (not just $30). Besides that, this amount of interest is often applicable only for a period of fourteen days. It means if you are borrowing for a period of 28 days, you will have to pay double (i.e. $300 for $500 of loan or $60 for every $100). If you calculate the APR, it can be a horrible figure, which can range from 200% per annum to as high as 950% per annum.

Penalty Charges On Nonpayment Of Loan On The Set Due Date

Now, if you fail to repay your loan to payday on its set due date (which is the day when you receive your paycheck), hefty penalty charges are charged. Besides that, the interest charges keep on adding at the same high rate for every single day of delay after you miss your due date.

Due Date Extension

Some payday lenders advertise about the “convenience” of due date extension, which means you are provided a “convenient option” to get your due date extended for one more month if you are not able to make the repayment in time. But, if you do your calculations thoroughly, you will find that opting for this convenience might prove horribly costly for you. For example, if you borrow a $500 of loan to payday for 14 days, you will be required to pay back around $650 on the due date. If you opt for a one-month

extension, the eventual outstanding amount will be somewhere around $950 or more after one month.

Overall, as you can see, the advertisements of a loan to payday might sound very lucrative and highly tempting, but those advertisements can be highly deceptive. Therefore, you are strongly recommended to go through the written loan contract thoroughly. Sign up for this type of loan only if you have a clear understanding about how

it works and whether you can really afford its extremely high cost.

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