Avoiding The Dangers Of Payday Loans

Most people get into trouble financially because they don’t understand the fundamentals of money, like for example compound interest. Certain terms and conditions for the repayment of payday loans can be burdensome. A payday loan is good for a short-term emergency, but it can be very hazardous when used for long-term capital requirements. Here are some tips on avoiding the dangers of payday loans and how to use them effectively.

Calculate The Interest Rate Annually

Compound interest can accrue very quickly. According to Forbes magazine, the J.P. Morgan Chase bank is worth $2.5 trillion in 2012. How did they make all that money? When you think of an interest rate of 4% or 5%, it does not seem like it would amount to much, but it can add up quickly over time due to compound interest. The principal increases as interest is added to it. With a credit card, many interest rates are 20% annually. The payday loan interest rate is even higher. It is important to calculate the annual interest rate of your payday loan, as some payday loans might be as high as 800% annually. Ensure you also compare payday loan offers as terms and conditions can vary dramatically between lenders.

The Details Matter

Read the fine print carefully on your payday loan contract: primarily the interest rate, period of time and additional fees. Determine if it is an annual, monthly or daily rate. If it is daily or monthly, calculate what it would be for an entire year. Fees and charges might be added to your payday loan also and a recurring charge could quickly add up. Some loans have what is called an “automatic roll over.” This means the loan will be “automatically renewed” if you don’t inform the lender. This could potentially be very dangerous, so ensure you carefully read and understand the terms and conditions of the loan before you apply.

Short-term Usage

Payday loans can be used efficiently for short-term emergencies: medical, transportation or special events. If a quick loan prevents you from going to collections, it could be worthwhile investigating. A payday loan is essentially like an “all-nighter;” when you have an important test it makes sense to live on less sleep. If you make it a regular habit though, you may have serious health problems. The same is true for long-term usage of payday loans. If used too frequently, payday loans could lead to serious financial problems.

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