4 Reasons You Shouldn’t Fall Prey to the Payday Loan Trap
Payday loans can set you up for debt that can come back to haunt you later, especially if you take out more than you can truly afford to pay back. It can be difficult for someone on a fixed budget to pay back these expensive loans in just two weeks, which is generally the amount of time given to repay such loans. If you’ve considered resorting to a payday loan to pay off an emergency expense, consider the following before doing so:
- High interest rates. Payday loans can carry outrageously high interest rates up to 300% for non-military consumers. However the Military Lending Act of 2006 limits the fees and annual percentage rates that payday lenders can charge servicemembers to 36%. This rate is still incredibly high - it triples the amount of standard credit cards percentage rates, which are start around 12%.
- Research findings confirm payday loans are a debt trap. A study conducted in 2013 by Consumer Financial Protection Bureau (CFPB) found that payday loans can lead consumers into a cycle of high-cost borrowing that CFPB calls a “debt trap.” If you are hoping to decrease your debt, a payday loan will only sabotage your plan for a healthy financial future.
- You may have to renew the loan. Often times those who take out payday loans really can’t afford to pay them back. So when the deadline arrives to pay back the loan, they have to renew a payday loan to get more time to pay it back or take out another loan from a different payday lender to pay off the previous loan. This can be the beginning of a spiral of debt that you may have trouble breaking free from.
- You have other options. Before taking out a payday loan that can put you into to more debt, consider these alternatives to a payday loan:
- Military relief organizations. There is a relief organization for every branch of the military, including the Coast Guard. Contact one of the military relief organizations below that offer emergency financial assistance to servicemembers in need before resorting to a payday loan.
- Air Force Aid Society -- Official support and relief organization for Air Force servicemembers, veterans, and families.
- Army Emergency Relief -- Official support and relief organization for Army servicemembers, veterans, and families.
- Coast Guard Mutual Assistance -- Major support and relief organization for Coast Guard servicemembers, veterans, and families.
- Navy/Marine Relief Society -- Official support and relief organization for Navy servicemembers, veterans, and families.
- Nonprofits that assist military members. You may be eligible for a relief grant from Operation Homefront, a nonprofit that provides emergency and other financial assistance to the families of service members and wounded warriors. The USO and American Legion are also options to look into.
- Installation banks and credit unions. Check with your financial institution to see what short-term loan options are available to you. The interest rates are sure to be much lower than payday loans.
The best way to avoid the need for a payday loan in the future is to set aside an emergency fund. Even someone on a modest budget can start an emergency fund by depositing as little as one percent of their paycheck each payday. Putting together a spending plan or budget can also deter your need for a payday loan. To get more information about payday loans, visit the Consumer Federation of America’s payday loan information page at http://paydayloaninfo.org.
- Category: Blog
- Published: 17 April 2014