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5 Risks of Payday Loans You Need to Know

Payday loan provides instant cash to people that are facing financial difficulties. The loans are usually less than $500 that is repaid within a few weeks. They are similar to microcredit but with a different agenda.

While microcredit is given to poor individuals (mostly in developing countries) to generate additional income, payday loans are issued to individuals having poor credit to meet their cash shortfall until the next pay day.

Another fact about payday loan is that they entail a high interest rate. A typical two-week loan has an Annual Percentage Rate (APR) of about 400% in the US. The amount that you have to pay as interest charges is not significant if the loan is repaid on time. For instance, the interest charges for a two-week $500 loan have an APR of 400% is $75 if it is repaid when due.

That being said, the net loan charges can easily amount to a long sum if they remain unpaid for longer durations. Apart from the high interest rate, there are other dangers of payday loans that can result in the individual falling into a deep debt hole.

1. Penalty Fees for Non-Payment of Loan

You should note that most payday loan lender charge a penalty for non-payment of the installment loan amount. This amount is debited from the individual’s bank account. This penalty can turn out to be a large sum the longer the individual defaults on the payments.

2. Rollover of Payday Loan

Another action regarding the payday loan that can lead the borrower into a debt trap includes rollover of the loan. This simply means taking additional payday loan to pay the finance charges and the installment amount. This is a dangerous move as it quickly doubles or even triples the net amount due to the lender.

A new finance charge is added when the borrower is not able to repay the loan on the first payday. The finance charges keep on accumulating over time, and a time comes when they turn out to be double the principal amount leads. This leads to great financial difficulties for the borrower.

3. Penalties Levied by Bank

Whenever the lender attempts to collect the loan amount from the bank, the borrower has to pay a bank penalty. This penalty is imposed by the bank for not having the amount in the checking amount. Repeated attempts by the borrower to debt payment from the amount can greatly add to the payday loan amount.

4. Seizure of Car

Some payday loan lenders require that borrowers pledge their cars as collateral. Also known as auto title loans, the borrower will lose possession of the vehicle in case of not paying the amount when due. To avoid seizure of the car the borrower has to borrow additional sums that add to the net loan payment.

5. Online Scams

Applying for a payday loan requires you to enter confidential information. These include personal info such as your bank account number, social security number, monthly income and other similar information. In case this information gets in the hand of a cybercriminal, you can easily be robbed of not only your money but identity as well.

On a final note, you must keep the above risks in mind when applying for a payday loan. The loan can help in easing your financial difficulties. But it can also deepen your financial woes if you don’t take proper precautions.