Christian Family

Are Payday Loans Dangerous?

A payday loan may seem like a short-term solution to a financial emergency. People everywhere will use a payday loan if they incur a large debt and do not have sufficient funds to cover that debt. That is where the vicious cycle begins. Potential borrowers find the fast approval and instant cash the answer to their emergency financial need. From there, the borrower takes out 2-4 payday loans a months and does not realize the amount of fees and interest they must pay, until the payday loan company sinks their teeth into the borrower’s bank account.

Looking at Specific Dangers of the Payday Loan

See, what the borrower does not take into consideration is the amount of fees and interest associated with the payday loan. Fees alone are enough to devastate a person financially but the interest rate is a stunner. The APR (annual percentage rate), often runs anywhere from 300 to 700 percent on a two-week payday loan. Keep this in mind; the payday lender takes the interest and fees from the payment the borrower makes. For example, if $300 is borrowed, and the borrower makes four $80 payments, they still owe the original principal of $300. That is because the lender does not use the payment to pay down the principal, they use it to pay down the interest and fees. With APR’s of 300 to 700 percent, it could take six months to a year to pay off the original principal of $300.

The Truth in Lending Form

The truth in lending (also known as the TIL), is a 2-3 page form that breaks down all the individual fees and actual interest rate associated with the payday loan. It is used to protect borrowers form predatory lending practices and keep potential and current borrowers informed. However, borrowers fail to at least look over the document before they sign on the dotted line. If they took a few minutes to at minimum skim the document, and understand the difference between interest on the principal and the APR, they may think twice about signing. Problem is many borrowers consider the documents difficult to read. They are under the impression they must be a mathematical genius to fully understand the TIL. It is time to debunk that myth.

A Simple way to Understand the Truth in Lending

Interest is charged on the original principal balance of the loan. Most borrowers believe that is the actual interest rate they will pay. What they fail to realize is the lender rolls all of the fees charged on the loan on top of the original principal balance plus the interest rate. When this occurs, the borrower has a new interest rate at a far higher rate than they previously thought. Therefore, the APR reflects the true amount that is owed to the lender. With the fees sitting at ridiculously high numbers, often times higher than the loan itself, the APR goes through the roof on top of the original interest rate. Here borrowers can plainly see why it takes so long to pay off or pay down a payday loan. One pay check does not come close to paying off the loan, and there lies the new additional debt.