Payday loans can be a lifesaver when
you have a sudden emergency and need a cash advance fast, but there can be a
serious downside to this type of borrowing if you are not careful about who you
borrow money from. The danger comes from excessive penalties that are charged
on late payments by some of the less scrupulous payday lenders.
Payday loans are quite different to
any other type of borrowing. They are a way of accessing extra cash extremely
quickly and usually without any kind of credit check. The reason credit checks
are not necessary is that payday loans are always for very short periods of
time and for relatively small amounts of money. Provided you can demonstrate
that you have a job and a bank account, the lender can be pretty sure of
getting their money back.
The cost of a payday loan is usually
a fixed amount, which will vary with the size of the loan. This charge in
itself is perhaps not unreasonable for the service provided, but it is only
appropriate as a one-off fee over that short time period. If you were to work
out what that charge represented as an annual percentage rate (APR), you would
see that it then became astronomical, perhaps a hundred times higher than a
typical personal loan. This is because that charge is not meant to be applied
over a period of time like the interest on a personal loan would be.
If you don't pay a payday loan back
on the due date, you are leaving it open for the lender to apply extra interest
or penalty charges. It has to be said that this is what happens all too
frequently, and this is where many payday lenders really make their money, and
is what they hope for and depend on. Once this process starts, the extra
charges can very quickly amount to more than the original amount you borrowed.
This leads to a cycle that is impossible to break out of, because the debt is
for more that you are ever going to have spare in any month.
It must be said that there are still
plenty of responsible lenders that have fair and reasonable systems, so if you
don't pay a payday loan back when you are meant to, you can extend the period
of borrowing without ridiculous charges. The important thing is to check this
kind of information before entering into a loan agreement with a company. Many
people focus too much on who can give the money the fastest at the expense of
who is the fairest lender who will be reasonable if you are unable to stick to
your original agreement.
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