A payday loan is a small unsecured loan designed to help users get through short-term problems when they don’t have enough funds. When someone experiences an emergency cost like a flat tire or an unexpected bill, and they need to make a payment straight away, they can get a payday loan. The problem is that payday loans come with serious consequences.
Payday loans are notoriously difficult to pay off. Users often find that this short-term funding solution turns into a long-term burden.
The Debt Trap
The sky-high interest rates for payday loans make repayment incredibly difficult for users, especially when they’re living from paycheque to paycheque. The longer the repayment takes, the higher the costs balloon. The annual interest rates can be as high as 500%. That’s much steeper than any interest rate offered by a credit card or line of credit.
What often happens is a struggling consumer takes out a payday loan to take care of a financial issue and then tries to come up with enough money by the deadline to pay off the entire loan. They can only pay a fraction off. By the time they collect more money for the repayment, the debt grows with interest. This pattern repeats itself.
What Can You Do to Get out of the Debt Trap?
Stop Taking out Payday Loans
The first thing you have to do to get out of the debt trap is to stop taking payday loans. The more you take out, the harder it will be to recover.
Get Professional Help
If you’re deep in debt and you don’t think you can manage to get out of it on your own, you should visit a licensed insolvency trustee for professional assistance. They can help you file a debt consumer proposal or personal bankruptcy. If you want to know about the pros and cons of bankruptcy versus consumer proposals, you should click here to get more information about both of the debt-relief options.These resolutions can free you from the vicious cycle of debt from payday loans.
Avoid Other Risky Loans
Payday loans aren’t the only funding options that carry a big risk with them. Installment loans can do just as much damage to your financial situation. According to the consumer credit reporting agency Equifax, installment loans are one of the largest contributors to the growth of consumer debt and insolvency.
For a brief explanation, installment loans are unsecured, high-interest, subprime short-term loans — although not as short-term as payday loans. The initial perk of this type of funding is that you can try to pay it off bit by bit over a lengthy repayment period, typically up to 3 years.
The problem is that the high interest rates make the debt challenging for users to pay off on time. And lenders often offer to increase users’ loans and extend their repayment periods, pressuring them to keep the debt going. The business model wants users to be dependent.
Governments have been trying to reign in the predatory business practices of alternative lenders, but that doesn’t mean they’re still safe to turn to when you need funding. Applying for one payday loan is a slippery slope that can land you into terrible financial trouble.