Avoid the “Payday Loan” Trap

November 12, 2019 | By Steffens Law Office
Avoid the “Payday Loan” Trap

“Payday loans” are short-term, high interest loans that take a heavy toll on the unsuspecting, and should be avoided. The main problem is the sinister combination of upfront fees and interest rates which are very high - typically 300% to 400% per year. So, once a person takes out a payday loan, a vicious cycle begins. Unless the borrower receives a financial windfall, such as a tax refund, he or she needs a second payday loan, with yet another upfront fee, to pay off the first loan. Typically, this cycle is repeated again and again. Each loan larger than the previous, until the debt load is overwhelming. 

It should come as no surprise that these loans do more harm than good for a person’s credit rating. If the loan isn’t paid in full, a negative report on your credit rating is likely. Then, when a borrower goes to a bank for a more traditional loan, a large number of payday loans will show up on their credit report. The banker views this information as strong evidence that they are overextended and living beyond their means. So, the payday loan borrower is passed over as a poor credit risk. 

Finally, the continual stress that comes with living paycheck to paycheck, while attempting to pay off these loans is perhaps the main reason to avoid them. This type of heavy burden is very damaging to your health, oftentimes causing serious, potentially life threatening, ailments. 

We urge you to consider other alternatives, such as a short term loan from your bank or credit union, overdraft protection on your checking account, and, most importantly, living within a realistic monthly budget. 

If you, or someone you know, has fallen into the payday loan trap, consider seeking assistance – the sooner the better. We would be happy to talk with you about preparing a plan to escape this nightmare.