Why and How to Avoid The Payday Loan Cycle

By on | Payday Loan & Personal Loan Information.

A person’s credit score can have a vital impact on their future in a multitude of ways.  A person with a high credit rating will find it easier to purchase a home, buy a new car, or secure a much-needed loan.  The reverse is true for those with bad credit ratings.  One of the easiest ways to maintain a good credit rating is to make sure that all creditors receive payment promptly; this includes money owed to utility companies, landlords, banks, and other lenders including payday loan lenders.

The utilization of a payday loan can be a wise financial choice for a borrower in need of unsecured funds quickly.  These personal loans, once approved, pay the borrower within one business day.  Repayment to the lender is expected on the borrower’s next payday, usually between seven and fourteen days. 

A payday loan is easier to get than other forms of credit.  Most creditors perform a credit check before approving a loan.  A person with bad credit may have a hard time qualifying for any loan, let alone a bank loan, but since no credit check is done for a payday loan, poor credit isn’t a factor.  A payday loan is meant to be a fast, cheap way to fulfill short-term financial needs.  For this reason, lenders avoid time-consuming credit checks.    

Payday cash advance loans are easy and convenient, but should only be used in select cases.  These loans should rarely be used to pay other monthly bills; doing so could easily get the borrower stuck in a detrimental payday loan cycle.  A payday loan cycle occurs when a person uses a short-term loan to pay a certain bill.  When they get their next paycheck, they have to use most of it to pay back the payday loan.  In the meantime, they now have other bills due they can’t afford to pay.  They end up taking out another payday loan to pay those bills, and so the cycle continues.  This is a very good example of “robbing Peter to pay Paul” and it simply gets the borrower in too deep to get back out on their own.

If the loan fee on a payday loan is calculated under the guise of Annual Percentage Rate (APR), the cost of these loans is very steep. But, payday loan lenders do not make their income based on an APR. Instead, they charge a small loan fee to be paid at the time of repayment that is calculated on the basis that the term of the loan will not extend beyond two weeks. This loan fee is how the payday loan lenders make the servicing of a loan profitable to them. If they calculated their loan fees based only on the current APR rate, then their profit would not be enough to make the loan action profitable to the lender.

If a borrower needs $100 for two weeks, there would be a $15 charge on this loan.  In this example, the payday loan service charge is relatively very inexpensive, which could be a very good deal for the borrower in certain situations.      

However, complications with payday loans can occur if they are not paid back on time.  Payday loans do not usually have a specific charge for a late payment fee.  Instead, a late payment will be rolled over into a new loan carrying the same $15 loan fee for two weeks.  Using the above example of a $100 loan, the borrower who pays their loan back on time will owe $15 more than they borrowed.  On the other hand, if the initial $115 is not repaid on time, the outstanding balance will continue to increase until the debt is fully repaid.  If the borrower misses three consecutive due dates, he could potentially owe the lender $160 instead of the original loan repayment cost of $115.  It is easy to see how paying this debt back late can quickly add up to a much more difficult financial situation. 

Even though payday cash advance loans are cheap and fast, they should not be taken lightly.  These loans must be used only when absolutely necessary and should always be paid back on time.  If handled properly, payday loans could even become the starting point for turning poor credit into a decent looking credit report.  

If you decide to use payday loans to help solve short-term financial problems or for rebuilding credit, please use your payday loan options wisely. If you truly need the money for only two weeks, pay day loans are a good option available to you. However, if you need that money for more than two weeks, entering into a payday loan cycle is a road to financial ruin. If you know that you will not be able to pay back your payday loan on time, don’t take out the loan. Honestly, if you need the money for more than two weeks, please understand that the payday loan was not designed for someone in your situation and it would not be wise to engage one in your situation.