What are the dangers of payday loans?

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.

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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.

Debt cycle

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.

 

Automatic deductions

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!

 

 

 

 

Ways in which same day loans are different from regular bank loans

As you probably know by now, making ends meet can be a tad difficult especially with the high costs of living, shaky job market and squeezing of incomes. Lower income earners  therefore, find themselves in a difficult spot. They live from pay check to pay check and any financial emergency leaves them greatly exposed. So what do they do in such circumstances? They resort to same day loans to get access to small amounts of money needed to repair a car, a garage door, fix a leaking roof or simply pay off a bill that can’t wait. Ever wondered how different same day loans are from traditional bank loans? If you answered yes, you’ve come to the right place as we are just about to shed light on the differences so you can best make an informed decision.

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No credit checks

Ordinarily, banks run credit checks before your loan application can be approved. The purpose of the credit check is also to help banks determine how much they will charge you for a particular loan. The same cannot be said of same day loans. In essence, same day loan lenders do not put much emphasis on a person’s credit score but rather approve loans based on a person’s income. So long as you meet the basic requirements, you do not need to have good credit to qualify.

Smaller amounts and shorter terms

Same day loans allow you to loan smaller amounts usually not more than 1000 pounds. This amount of money is generally expected to be repaid on the next payday and this essentially means that most same day loans last for 2-4 weeks after which the borrower will need their money. As compared to bank loans, the amount advanced by same day loan lenders is relatively small and the period relatively short.

High-interest rates

The fact of the matter is, the interest rate charged on the amount you borrow from a bank is largely dependent on your credit rating. What this simply means is that the higher your credit rating, the lower the interest on your loan. The same cannot be said of same day loans that are known for charging astronomical interest rates hence making this type of loan dangerously expensive especially to low income earners.

No instalments

It should be noted that bank loans are required to be paid in instalments. For instance, if you borrow say 3000 pounds for a period of one year, you will repay a determined amount of money on a monthly basis until you clear the loan together with the interest. With same day loans, there are no instalments as the money owed to the lender usually matures within 2 weeks and automatically is deducted from the borrower’s accounts.

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Automatic deduction or repayment

One of the things you do when taking out a same day loan is that you sign a document giving the lender the power to automatically deduct the money owed together with interest from your bank account. The lender, therefore, has the permission to automatically deduct the balance from your bank account or cash the check you wrote to them without having to notify you on the day the loan matures. With traditional bank loans, that is not the case. If you default on a number of occasions or you are unable to repay, the bank usually confiscates your collateral.

Renewal is a walk in the park

If there is something interesting about same day loans, it has to be the fact that renewing the loan is quite easy. If you feel that you won’t be able to repay the loan as initially agreed, you can always approach your lender for renewal of the same. However, the downside is that you end up paying exorbitant fees and if you are not careful, you might actually find yourself deeper into debt.