Direct lenders for payday loans are bound by law to educate consumers on the perils of payday loans, but not everyone understands the terms. Despite the industry’s best efforts to tell consumers how to properly use payday loans, some people decide to ignore all the advice and end up getting into trouble. Payday loans are short-term loans, with high interest rates, and there are a few practices that consumers should avoid in order to safely take out a payday loan.
Borrowing Too Much
Initially, if you have never taken out a payday loan, a good lender will limit your first loan to $300 or less. This is to keep you from taking on far more debt than you can manage. The repayment of the debt is automatically withdrawn from your bank account in your next paycheck cycle. The smaller the amount, the less effect it has on your budget. However, some people that it is simply not enough money and they try to take out multiple small loans with multiple lenders at the same time, causing havoc with their finances.
After realizing their mistake, they will opt to roll-over the balance of a payday loan instead of repaying the full amount. Since the short-term loans are set up with higher interest rates than other types of loans, it can cost far more to roll it over than to pay it off. If the rollover happens over and over, the annual interest rate can quickly cause the debt to double, making it even harder to pay off.
If you default on a payday loan it does affect your credit. It also will keep you from having access to other types of loans and penalties and fees can be large. You will end up in collections. To avoid defaulting, if you find yourself in a position where you’ve taken out too much money, too many loans, or simply couldn’t pay it back as you had hoped when you took out the loan, it might be better to borrow money from a fixed rate loan to pay off the debt before it balloons into something worse.
Have you ever taken out a pay day loan? Did it help or hurt in the long run?