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Probing the Bad Effect of Payday Loans

Payday loan stores seem to be popping up everywhere and a few people think that they are the best things ever, but in reality they are the tabloids of the credit industry, as far as reputable credit institutions are concerned. It’s obvious that they are supplying a tangible need for the demands of the public, or else they wouldn’t be surviving. So if that many consumers are freely choosing to deal with them, then why are payday loans bad?

Maybe the best way to illustrate this point is to use our imagination a little bit and create a real-life scenario that many people face.

Payday loan companies defend their position by claiming that they are offering a service that is needed by many people. More often than not, life deals a bad hand of unexpected problems that you need help with. Why are payday loans bad, they ask, if you have car trouble or a medical emergency and need fast cash now? It is an unbelievably quick and easy way to solve the problem on the spur of the moment. However, for many, it is also a way of getting into a nightmare that will seem like quick-sand.

Let’s imagine that we have a young family of five that has only one source of income. The dad goes to work and the mom stays home and takes care of three toddlers. They are debt-free but yet they are barely making a go of it. Suddenly, the car breaks down and all at once they need money for mechanical repairs. In a situation like this, a payday loan could look like their salvation, so why is it bad?

The family borrows $500 and is charged 17.5% interest on the loan every two weeks. If they pay it back in two weeks they will owe $587.50. What’s so bad about that? Chances are that they aren’t going to have enough money to do it by the time it is due, because it will be hard to come up with that much money in just two weeks. At that point, they will be charged another $80.50 in additional interest. With that, their $500 loan is slapping them with a total figure of $675. It’s easy to see how this is beginning to spiral out of control.

At present, there is a little over 20,000 payday stores in the United States, which makes it seem as though it is a little too easy to rely on them. The industry made, in 2010 alone, over $4 billion on interest. When attempting to come up with an answer to the question as to why payday loans are bad, most can see that they are taking advantage of people when they are at a time of crisis, when they desperately need help, instead of being socked with high interest charges.

Another drawback to payday loans is that they don’t reflect a good report to your credit score. If you fail to pay the loan off, your credit score is jeopardized.

Because payday loans are notorious for charging astronomical interest rates, they give the whole industry a bad impression from the very start. In comparison to the normal credit card company that charges an annual rate of 32% interest, the two-week payday loan at 17.5% interest generates an annual interest rate of 455%. The numbers can be staggering, which adds proof to the fact that they are a bad financial decision from the very first step.

If you are in urgent need of a loan, then look for other possibilities. Check your local bank, your credit card establishments or even with friends or family members that could offer some support.

If you still can’t see why payday loans are bad, then do some research online to find numerous stories where people got caught up in this vicious cycle, having their wages garnished and wind up paying incredible figures for the small cash advance that seemed so desperately needed at the time.

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