For many in the lower income bracket, such as those who live paycheck to paycheck or are burdened by excessive debt, the thought of a quickly-approved cash advance can be enticing. Unfortunately many who are desperate for money in a short amount of time fall prey to a form of predatory lending commonly referred to as payday loans.
How Payday Loans Work
Often called cash advances, payday loans are unsecured loans issued by financial service companies that expect the lender to pay back the borrowed sum immediately after their next pay day. In Canada, Money Mart, Cash Money, and Western Union are among the popular companies that actively lure borrowers into the pay day loan scheme by promising a quick fix to their immediate financial needs. As these companies actively promote engaging in risky short term financial planning, customers who are sucked into the pay day loan cycle often face harsh financial repercussions.
How Payday Loans Affect Vulnerable Low-Income Borrowers
High Interest Rates on Fast Approved Loans
If the payday loan is not paid in full by its due date, then the borrower is typically subject to interest rates of twenty percent or higher. This is substantially higher than the interest that would be charged on a short term loan from a regular bank. Since payday loan companies are aware that their clients have been rejected from acquiring traditional loans and have turned to them as a last resort, they are able to get away with charging such whopping interest rates.
Lowering Your Credit Rating
Among the most damaging long term effects of entering the payday loan cycle is that this form of borrowing often has destructive effects on one’s personal credit score. Usually borrowers who resort to payday loans do so as their credit rating is unable to afford them regular short term loans from their bank. Yet failing to pay back a payday loan in full upon its due date prompts most banks to drastically reduce one’s credit score.
Conclusion: Avoid Payday Loans at All Costs
Given the potential for payday loans to cripple your personal finances and wreak havoc on your credit rating, it is strongly advised that you avoid them at all costs. If you are living off of each month’s paycheck this may seem easier said than done. However, even if you are making minimum wage and are stuck in a dead end job, there are practical steps that you can take to protect yourself. Of the utmost importance is to direct any savings you can amass into creating a small safety net (enough to cover about a month’s worth of rent and food). If this means that for a period of time you will have to eat out less, not spend as much money on entertainment, and generally live a frugal lifestyle, it is vital that you do so for your long term well-being. Finally, if you are caught in a dire financial situation consider turning to a sympathetic friend or relative for assistance. This may be a difficult step to take for some, but it is better to swallow one’s pride and ask those close to you for help than to face the prospect of financial ruin resulting from payday loans.