Payday loans are short-term allowances that are easy to get and convenient to use for one-time emergencies.
However, that accessibility and convenience come at a cost. Some key findings of CFPB’s extensive research are as follows:
Four out of five loans are rolled over or renewed within two weeks.
Three out of five loans are made to those whose fee expenses exceed the initial size of an allowance.
One out of five new loans end up costing the borrower more than the original amount borrowed.
The difficulty in repaying a loan stems from a variety of unique challenges facing borrowers that go beyond the growth in inflation and the changes in economic climate. In this article, though, you can identify the issues that make it hard to repay a payday loan, ways to overcome them, and alternative options of funding to successfully cover your unexpected expenses.
The Challenges with Payday Loans
Short-term allowances, such as payday loans or cash advances, are more likely to confront the following operational and financial issues than their larger counterparts, such as credit card bills or personal loans.
Large Debt or Low Income
Most providers look at the debt-to-income ratio and other financial options of each borrower to determine their capacity to repay a loan. Based on this info, they will generate specific terms individually.
For instance, those people who have a high DTI ratio (50 and above) and have not yet secured a stable income are riskier for lenders, as there is no guarantee that they will make successful payments on their loans.
In this case, providers consider how much money they are willing to lend. Many lenders simply leave such borrowers with higher interest and excessive debt as the loans roll over.
High Interest Rates
Even if you only have the payday loan for a few weeks, it can cost you more in interest than it would for a personal allowance or even a credit card advance. This results in a very inflated percentage rate which often reaches triple-digit figures with a payday loan.
Short Repayment Period
Payday loans are often problematic for those who don’t know where to get access to money fast and have no other financing options readily available. However, these types of loans are short-term, meaning that the repayment period comes usually within two or four weeks. And even during that time, you are likely to pay much more in fees than you would pay for a credit card bill or even a personal loan.
Debt Renewal or Extension
Since there is no limit on how many times a customer can get a payday allowance, it is a vicious cycle that feeds on itself. Even for those who still manage to stay afloat with their existing debts, there is a cost in falling into a flow of repeatedly renewing their allowance for another pay period. So, the ethic of more and faster generates only a short-term value as the fees continue piling up.
How to Address Payday Loan Challenges
Before agreeing to get a payday loan, you will need to minimize the potential challenges and risks that could come with these short-term borrowing options. You can do that by combining several strategies mentioned below.
Maximize Income
Your debt-to-income ratio is your monthly income amount compared to your debt expenses. This figure demonstrates to payday providers whether you have enough resources to repay your debt. The excellent ratio to have is less than 37%. If you need to lower your DTI, increase your either monthly income or the amount you pay in debt each month.
Pay Off Early
As it can’t be otherwise: the longer you repay the initial size of your loan, the more you will pay in interest. Thus, before agreeing to get a payday allowance, try to understand your capability of paying it back. If there is a chance you owe your loan for more than a few months, it’d be better to consider some alternatives to payday loans instead. The list may include but is not limited to:
Credit card cash advances
Loans from your family or friends
Employee loans
Hardship payments from your creditors
Local hardship programs
Create a Budget
Once you are on your feet, try to set up an emergency fund to cover your future life’s surprises. Try to reduce as many unnecessary expenses as possible and focus on adding funds into your savings account that you can use when in need. A starting point of $500 is a good place to start. Then, you can build it up to $1,000 or even more.
Payday loans are short-term allowances that are easy to get and convenient to use for one-time emergencies.
However, that accessibility and convenience come at a cost. Some key findings of CFPB’s extensive research are as follows:
The difficulty in repaying a loan stems from a variety of unique challenges facing borrowers that go beyond the growth in inflation and the changes in economic climate. In this article, though, you can identify the issues that make it hard to repay a payday loan, ways to overcome them, and alternative options of funding to successfully cover your unexpected expenses.
The Challenges with Payday Loans
Short-term allowances, such as payday loans or cash advances, are more likely to confront the following operational and financial issues than their larger counterparts, such as credit card bills or personal loans.
Large Debt or Low Income
Most providers look at the debt-to-income ratio and other financial options of each borrower to determine their capacity to repay a loan. Based on this info, they will generate specific terms individually.
For instance, those people who have a high DTI ratio (50 and above) and have not yet secured a stable income are riskier for lenders, as there is no guarantee that they will make successful payments on their loans.
In this case, providers consider how much money they are willing to lend. Many lenders simply leave such borrowers with higher interest and excessive debt as the loans roll over.
High Interest Rates
Even if you only have the payday loan for a few weeks, it can cost you more in interest than it would for a personal allowance or even a credit card advance. This results in a very inflated percentage rate which often reaches triple-digit figures with a payday loan.
Short Repayment Period
Payday loans are often problematic for those who don’t know where to get access to money fast and have no other financing options readily available. However, these types of loans are short-term, meaning that the repayment period comes usually within two or four weeks. And even during that time, you are likely to pay much more in fees than you would pay for a credit card bill or even a personal loan.
Debt Renewal or Extension
Since there is no limit on how many times a customer can get a payday allowance, it is a vicious cycle that feeds on itself. Even for those who still manage to stay afloat with their existing debts, there is a cost in falling into a flow of repeatedly renewing their allowance for another pay period. So, the ethic of more and faster generates only a short-term value as the fees continue piling up.
How to Address Payday Loan Challenges
Before agreeing to get a payday loan, you will need to minimize the potential challenges and risks that could come with these short-term borrowing options. You can do that by combining several strategies mentioned below.
Maximize Income
Your debt-to-income ratio is your monthly income amount compared to your debt expenses. This figure demonstrates to payday providers whether you have enough resources to repay your debt. The excellent ratio to have is less than 37%. If you need to lower your DTI, increase your either monthly income or the amount you pay in debt each month.
Pay Off Early
As it can’t be otherwise: the longer you repay the initial size of your loan, the more you will pay in interest. Thus, before agreeing to get a payday allowance, try to understand your capability of paying it back. If there is a chance you owe your loan for more than a few months, it’d be better to consider some alternatives to payday loans instead. The list may include but is not limited to:
Create a Budget
Once you are on your feet, try to set up an emergency fund to cover your future life’s surprises. Try to reduce as many unnecessary expenses as possible and focus on adding funds into your savings account that you can use when in need. A starting point of $500 is a good place to start. Then, you can build it up to $1,000 or even more.
Recent Posts
Recent Comments
Archives
Categories