Disaster strikes when you least expect it. You might find yourself needing cash urgently, to which end easy payday loans may seem like a good idea.

Unlike other sources of short-term financing, they are easy to access and don’t require any credit check. But, no matter how hard up for cash you are, don’t fall for the payday loan ripoff.

You need to avoid them at all costs. This article explores some of the dangers of payday loans. Read on.

Easy Payday Loans: How Do They Work

A payday loan is exactly what it sounds like. It’s an advance on your next paycheck. It’s quite a straightforward process.

You approach your lender with a stub or payslip as proof of your income. Your lender will then give you a short-term loan for that amount. You’re expected to pay it back together with an additional fee when you receive your next paycheck.

Aside from your pay stub, you’ll need to provide them with a copy of your bank statement and bank information to apply for the loan. They’re usually approved quite quickly and the loan is deposited directly into your bank account.

Depending on the lender’s conditions, you may have to write them a post-dated check for the loan amount plus any applicable fees. The date on the check should coincide with the date the borrower receives their salary.

On the date that the check matures, you are obligated to offset this amount immediately after you receive your wages. Defaulting on a payday loan opens you up to a potential lawsuit or criminal proceedings against you.

The Problem with Payday Loans: Why They Are Dangerous

According to research conducted by Pew Trust, a staggering 12 million US citizens take out payday loans annually spending well over $9 billion on exorbitant fees. On the surface level, they might appear to be an attractive option given the convenience attached to them.

But, digging a little deeper reveals unspeakable horrors that spell disaster which could be devastating to the average consumer. Here are some of the reasons why you need to avoid this version of predatory lending like the plague.

1. High-Interest Rates

If you thought that credit cards have high interest rates, think again. You clearly haven’t come across payday loans.

The average APR on credit cards stands at about 17.73%. You might need to brace yourself for what’s coming next.

Payday loans have interest rates that run as high as 911% for a one week loan and 212% for a one month loan. If you think it’s a typo, well, it’s not.

Your loan may have started out as a short term fix, but, if you think about what you end up paying on interest alone, it’s not worth it. Bear in mind also that all your transactions with your lender will be via electronic money transfer services or through direct deposit.

This means that when they assess their exorbitant interest rates, they have access to your bank account. You might wake up one day to find your bank account wiped clean in order for them to recover their loan.

One of the problems with payday loans is that most borrowers are unable to satisfy the full loan amount by the time payday’s rolling around. This is mainly due to the quick turnaround time of the loan.

So, instead of defaulting on their loan, their natural solution is to renew the loan to buy some time. This sets off a vicious cycle of loan renewals every time payday comes around.

What’s more, there’s no limit on the number of extensions you can get. So, in the end, you may end up paying interest, fees, and penalties that all amount to the same figure as the loan itself.

2. Exorbitant Fees

Advance payday finance might seem like a quick fix to an immediate cash crunch, but in the end, you’ll end up digging yourself into an even larger pit.

Given that they come with fast turnaround times, once payday rolls around, the borrower faces two options. They could default on the loan and risk getting sent to collections.

Alternatively, they can pay an extension fee to buy themselves some more time. Most extensions apply for an additional period of two weeks.

It doesn’t end there. Every time a loan renewal occurs, most companies base the assessed fees on the existing outstanding balance.

Say, for instance, you took out a payday loan of $500. The lenders assessed a fee of $75 dollars on the amount lent. They’ll expect you to pay back $575 on payday.

However, you find yourself unable to settle your financial obligation to them, so you apply for a renewal of your loan. Depending on the lender’s renewal fee, you should expect to pay back about $650 by next payday.

If you’re still unable to meet your obligation when payday arrives, then the amount you owe goes up to $725. What initially started out as a quick fix escalates quickly, making it even more difficult to pay off the loan.

This inevitably leads borrowers to keep renewing the loan, thus falling deeper into debt. The more the loan amount grows, the more difficult it becomes to pay it off in full.

Some borrowers end up approaching other payday finance lenders to take out a new loan in order to settle the existing one.

3. Infinite Debt Cycle

The payday loan debt cycle has two major categories.

Category one: The average borrower remains in debt for a longer period of time than they had initially intended to because of the high fees and interest rates on the loan. So, they get caught up in a cycle of extending the loan for an additional time period.

Category two: The borrower opts to take out yet another payday loan to channel the money into paying off old payday loans. When it’s time to pay off the new lender, they borrow from another lender to pay off the current debt. This cycle could repeat itself for an extended period of time with no end in sight.

Picture this. An emergency comes up and you find yourself in urgent need of some fast cash. You realize that you don’t have enough money in your checking and/or savings account and you’ve already maxed out your credit cards.

You turn to a payday lender who offers you the immediate relief you desperately seek in form of on-the-spot cash. You’re able to sort out your emergency, which brings you a temporary wave of relief. You blink and it’s payday again.

The money you have isn’t enough to pay off your loan and meet your living expenses as well. So you opt to apply for a renewal by adding some additional funds and crossing your fingers that you’ll be able to settle the amount with your next paycheck.

Sadly, this isn’t the case. So once more you put down more money to extend the loan. This cycle of debt keeps going, and before you know it, the amount you owe in fees is much higher than the outstanding loan.

4. Direct Access to Your Bank Account

Most lending companies front “good customer service” by informing you that you don’t have to go through the added inconvenience of having to write them a check. Simply provide your account details and they’ll debit the money directly from your account.  And you think to yourself, “How convenient!”

Then, payday rolls around and your loan balance has grown. You can’t afford to pay it off and also pay for your day-to-day expenses as well. Despite this fact, the lenders having access to your account means they’ll still keep trying to shove their payment through.

At some point, you might find your account overdrawn, which now means you have to pay overdraft fees to the bank too! Don’t forget the fact that when you write a post-dated check to the lender, you may not have enough funds in your account to cover the full amount. Both your bank as well as your payday lender will charge you bounced check fees.

5. Horrendous Debt Collection Practices

The day of reckoning arrives and you find that you owe way more than you can afford to repay. If you thought your situation couldn’t get any worse, brace yourself for stormy waters ahead.

Most payday loan companies are infamous for their atrocious debt collection practices. If you expect the Fair Debt Collection Practices Act to protect you from these loan-mongers, you’re mistaken.

They’ll harass you with late night phone calls and unending threats to initiate criminal proceedings against you. They’ll harass you and your neighbors, leaving you with unthinkable embarrassment. They engage in lots of other debt collection practices that will leave a bad taste in your mouth.

If you’re wondering how on earth they get away with such outlandish practices, the reason is simple. Payday loan companies typically offer their services to people who find it difficult to access loans through mainstream channels, perhaps due to poor credit scores.

From their perspective, they serve a demographic that carries with it a substantial risk for default. So, they’re used to dealing very aggressively with borrowers who don’t pay back loans as they promised.

6. Enables Unhealthy Financial Behavior

Getting a payday loan is a quick, painless and convenient process that provides a temporary fix for a long-term financial problem. Unlike other loans, you can apply for a payday loan over your lunch break and get it approved instantly.

However, the ultimate price you’ll have to pay for these loans doesn’t justify taking them in the first place. They only serve to strengthen unhealthy financial practices without actually remedying the underlying cause of the problem.

It may not seem like much of an issue to take out a payday loan for an unforeseen emergency. But, the reality of the matter is more people are taking out these loans to pay for day-to-day living expenses like covering rent, paying utility bills and even using the money for grocery shopping.

The reason these loans are so harmful is that they encourage you to take out fast loans every time you need cash. That cripples you when it comes to learning how to manage your finances properly.

Bear in mind as well that payday loans do not carry the right of rescission. This means that once you sign on the dotted line only to later change your mind, there’s no backing out, even if it’s within the same day. You have to pay back the loan with all the fees due.

The Bottom Line

The key to financial freedom lies in learning how to budget properly and put money aside every month to cater for any emergency that may crop up. Taking out easy payday loans to cover day-to-day living expenses is a red flag that you need to renovate and restructure your finances as a matter of urgency.

The reality is if you find yourself in need of a payday loan, you need to learn how to live within your means, even if it means seeking help from a professional to help you do it. Besides, there are lots more affordable ways to get loans that won’t lead you to financial ruin.

If you’re already caught up in the vicious cycle of debt, it’s never too late to start cleaning up your finances. Your future self will thank you.

Not sure about which loan to take for your business? Read about merchant cash advance versus other loans.