While the relief of getting a cash advance as and when you need it cannot be compared to anything else, the trouble sets in when a person is unable to repay the loan as expected. For a long time, payday loans have earned the negative reputation of making individuals to be worse financially than they were when they first took the loan. It is perhaps for this reason that most financial experts advise against taking payday loans unilaterally. A payday loan should be in response to a serious financial emergency and not just for the fun of it. In light of this, what are the dangers of taking out payday loans?
High renewal fees
One of the dangers of taking out a payday loan is that an inability to pay means two things: one, you have to take a new loan to clear your already existing debt or two, you have to renew or rather roll over the existing loan. The effect is that you have to contend with renewal fees which further make the cost of the loan expensive. The more the loan is renewed, the higher the burden of repayment and at times, a person might find themselves finally paying off twice the principal amount.
Negative impact on credit score
Ordinarily, payday loan lenders don’t put great emphasis on a person’s credit score prior to approval. What this simply means is that those with a less than stellar credit rating can easily apply and get approved. However, with the high-interest rates and high probability of defaults, a person can further worsen their credit score. Defaults and missed payments negatively affect credit scores which essentially means that getting approved for a loan or even a phone contract in the future might prove herculean.
You probably have heard of the term debt trap or debt cycle. A situation whereby you are trapped in a never-ending cycle of debt. Your meagre earnings cannot meet your loan together with interest and so you resort to borrowing more or renewing your loan over and over to an extent where you are so deep that getting out becomes a problem. This debt cycle is dangerous and if not checked, can lead someone to file for bankruptcy.
If there is something unsettling about payday loans, it has to do with the fact that the borrowers can deduct money owed to them from your bank account when the loan matures. In most cases, the borrower gives the lender permission to automatically deduct the money owed from their bank accounts. The downside is that if there is no cash in the bank account on the appointed day, the borrower will have to deal with hefty bank fees not to mention penalties from the borrower for missed payments. The end result is that you end up getting deeper into debt!