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4 Pitfalls to Avoid When Taking out a Payday Loan

Estimated reading time: 5 mins

For many people, the sheer mention of a payday loan causes them to wince and crinkle their faces with concern. The concept of the payday loan is something that should be helpful for those occasions where the pennies just don’t seem to stretch until your pay date, however the reason that so many people experience problems with payday loans is because they do not read the small print and familiarize themselves with the terms and conditions prior to taking it out.

These individuals that find themselves accruing extortionate fees and interest rates have not understood the repayment time scales and  terms of the loan. This guide exists to provide some guidance to help you navigate the minefield world of payday loans.

In an ideal world, payday loans wouldn’t be necessary – we would be able to save money and reduce the costs of our bills enough that we are back in the green. Unfortunately, that isn’t always possible and so there may be times where we need a little extra financial assistance. Dealing with debt can cause stress and can result in filing for bankruptcy, so by taking the necessary steps and precautions, this can be avoided.

4 Pitfalls to Avoid (or ignore them at great cost!)

Shady and Unproven Lenders

It’s a known fact that payday loans have fees and interest rates that are a little higher than your average bank loan. So with that considered, if you find a provider that is willing to lend you the cash that you need at a much lower rate and with better terms than the average payday lender then that sounds like a great find right? Not necessarily. As with many things, when it comes to payday loans, if it sounds too good to be true then more than likely it is. Always always do your research on a lending provider to make sure that they are legitimate before you opt to take out a loan with them.

Some lenders that provide payday loans online are not even based in the USA at all and use a US mailbox rental store address in order to deceive and make it appear as though they are based in the USA when really they are not. If you opt to loan money from an overseas lender, you will not be covered by your states lending laws. Not to mention that it could be risky to share your sensitive personal data (banking information, address details, etc) to an unknown provider. By the end, you could wind up encountering more problems with such a vendor than simply organizing repayments with them.

Before opting to take a payday loan from anyone, check that they are licensed, ensure that their address is a genuine location within the United States, and browse past reviews from other customers.

Incredibly High Interest Rates

It’s true that payday loans typically come with higher interest rates than a typical bank loan but they should not be so excessive that they make you cry more than chopping and onion. Whereas a bank or credit card debt can be accompanied by an interest rate that ranges from 10 to 20%, a payday loan interest rate could even exceed beyond 500% or 1000%.   

Some lenders try to get away with affixing extortionate interest rates to their loans in the hope that potential customers will simply not be informed about what is the standard or maximum rate that they should expect and therefore will not debate it. You should note that some US states have actually place a legal limit on how much a lender is able to charge. Familiarize yourself with the specifics in your system prior to taking out a loan.

Suspicious Fees

Unfortunately the risks with payday loan costs are not simply limited to extortionate interest rates. Some lenders try to sneak additional fees into their offering in order to make up extra profits without exceeding the state’s maximum interest rates.

Be mindful of this when reviewing your options and compare and contrast the policies of a few lenders prior to taking out a loan anywhere in order to ensure that you are not being exploited or taken advantage of. Any fees that are due should be clearly specified and quantified in the loan paperwork. A major red flag will be if the lender tells you that an additional balance is due, however there was no prior mention of it in the paperwork.  

Biting Off More Debt Than You Can Chew

Payday loans should really be seen as a last resort rather than a frequent source of extra cash or financial aid. If you conclude that you absolutely need to take out a payday loan otherwise you will struggle to make ends meet then serious consideration should be made in terms of how much money is actually required.

Sure it would be nice to have an extra $600 sitting comfortably in your bank account, however if the bills that you have due only add up to $400 then you should try to loan a figure that is as close to this amount as is possible. One of the reasons that people find themselves drowning in a sea of loan repayments and falling victim to the perils of high interest rates is because they took out more money than they needed and cannot afford to pay it back. So what should just have been a quick borrowed $500 winds up costing far, far more.

Avoiding the Pitfalls

If you are not deterred from taking out a payday loan (you shouldn’t be!) after reading about the potential dangers here then there are a few precautions that you can take in order to ensure that you have a positive experience. As with making any purchasing decision, it is important to do your research.

Always use a trusted lender and try to read past reviews of the company that you are considering prior to taking the leap with them. Learn more about payday loans before you make any final decisions.

Make a financial plan to ensure that you are aware of when repayments need to be made and how much is due so that you can budget accordingly and be sure not to overspend in other areas (food shopping, dining out, etc) therefore causing you to fall short of the amount necessary for repayment. Provided you read all of the information fully, you should have no problems.

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About the author /


Simon is a creative and passionate business leader dedicated to having fun in the pursuit of high performance and personal development. He is co-founder of Applied Change, a Business Change consultancy based in the UK. Simon is also an Ambassador for Gloucestershire business. Simon is an Associate Member of the Chartered Institute of Professional Development.

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