Payday loans are dangerous – there really is no other way to describe them. These loans, made even more problematic because of how easy they are to get, are continuously being criticized in the media as taking advantage of regular hard-working Canadians. This week we are talking about why it is so important to get out of the vicious cycle that is payday loans and how to do so.
Why are payday loans so terrible? Let’s look at an example.
When you take out a payday loan, you write a cheque for the amount borrowed plus a fee for borrowing to be cashed by the lender on your next payday (2 weeks in the future). If you can’t pay on that date, the payday loan company doesn’t mind – it just means more money in their pocket as they’ll just let you roll over the payment until the next payday, again charging you that fee for borrowing.
Say you borrow $1000 for $200, that means you will owe $1200 on your next payday. If your next pay is $1500, then you have a $1200 payday loan to repay, only leaving $300 to live and pay bills for 2 weeks. However, if you don’t pay that initial $1200 and instead roll the loan over, now you’re looking at even more in interest to repay on your next payday. See the problem?
For many, this vicious cycle continues because there never seems to be enough to pay off the initial loan plus the ever-accumulating interest. Often individuals with problem credit end up taking out these loans because they are vulnerable and no one else will loan the money – but they are often the ones most strapped financially.
The typical fees for payday loans are between $51 to $72 on a $300 loan. This works out to an annual percentage rate of 443% to 626%. As you can see, what seemed like a viable quick fix short term loan comes at a very high cost!
We have seen people with a mere few thousand dollars in debt file for consumer proposals because of this – it’s not the amount of debt that is the challenge, it is the aggressive repayment terms.
What’s worse, they don’t even report to your credit, so if you’re thinking they might do in a punch as far as quick rebuilding of bad credit, think again!
If bad credit is what led you to payday loans to begin with, now is the time to stop getting sucked in. Pay those loans off, once and for all.
When your credit is bad, some lenders may not want to lend to you unsecured – but some collateral may change their mind. Look at what you have as far as assets to offer to a lender as security. Do you own a car that is paid off, or do you have equity in your home? These are two excellent things that you can leverage to consolidate your payday loans.
A secured loan makes good sense – you can amortize your payments longer, they usually carry less interest than payday loans and they report to the credit report so they help you build good credit. It is a win-win scenario.
At Prudent Financial, we understand that payday loans may seem attractive at first sight, but we also know how dangerous they can quickly become. Want to get out of the vicious cycle?
Call us today at 1-888-852-7647.