The Negative Effects of Predatory Payday Loans With Financial Expert David BakkePicture_2

Payday lenders pretty much wrote the book on predatory lending. So when it comes to fighting them, we turned to one of our favorite financial authors: David Bakke (@YourFinances101) writer, blogger, and money expert.

David, payday loans are considered risky and dangerous. Is there ever a reason to take one out?

A payday loan is a short-term loan in which the borrower agrees to pay the loan back once their next paycheck is received. Essentially, the borrower’s next paycheck is signed over to the lending company. The loans normally come with an exorbitant interest rate, and the principal is usually less than the anticipated amount of the next paycheck.

From a financial standpoint, payday loans are quite dangerous because of
 the interest involved and the usually precarious financial state of the borrower. When possible, payday loans should be avoided because there are more favorable ways of borrowing money (like from friends and family or taking out an installment loan from a reputable lender).

Consumers should avoid payday loans at all costs, especially because there are other options at their disposal.

What is the “Payday Loan Debt Cycle” and how long can it last?

The payday loan debt cycle comes about when you take one of them out, can’t afford to pay it back, and then are offered a renewal on the loan for an additional fee. That cycle tends to extend itself for months or even years.

Currently, this is legal, although legislation has been introduced to place more oversight and regulations on companies issuing payday loans—specifically, requiring lenders to verify that the borrower has the ability to pay the loan back.

Who do payday lenders target?

Payday lenders, generally speaking, target low-income folks because those are the ones most likely to have to rely on such a product, since other forms of financing may not be available.

How can consumers avoid payday loans?

The best way to avoid payday loans is to create a personal budget for yourself. Use a website like Mint or create one using a Microsoft Excel spreadsheet or even one on pen and paper. Then reduce your monthly bills as much as possible, and send in the surplus to your debts instead of taking out a payday loan. Borrowing more responsibly means taking out a loan on your credit cards (which is essentially the same thing as making a purchase), but only if you can afford to pay
the purchase off before the bill comes in. Another example of
 responsible borrowing includes getting funding for a new home or a student loan, either of which will normally pay off for you in the future.

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