How Payday loans work: Truths, Myths, and the Potential Catch


Based on the Consumer Financial Protection Bureau, payday loans are high-cost, short-term loans for small sums. These loans are definitely not the best deals in the world of personal finance, However, many consider them to be an easy solution to immediate cash flow problems. However, they tend to not be the most ideal option if you’re looking to borrow money. They can make you fall into a trap that is difficult to escape from.

Take out the personal loan option instead of payday loans to reap these advantages. Find out more about options for personal loans and apply for one.

Is the truth behind the Payday Loan Easy Fix

This is the fairy-tale tale that explains the popularity of payday loans.

At some point, one suffers a minor, short-term financial crisis. To illustrate this tale, imagine that the refrigerator malfunctions and there’s not enough money saved to purchase the new model. A person will need 500 dollars to purchase a brand new refrigerator in a short time so that food items and other perishable items can be stored in the house.

Because the payday is two weeks away and the person is forced to take payday loans to get money. They think that they’ll repay the loan once they’re paid, and the story is going to be a happy one for all time.

What’s the truth about Payday Loans?

Oft, the real story of payday loans is like this.

In the dark, dark forest, the cabin’s refrigerator stops working and there’s not enough cash to replace it. The owner of the cabin takes out the risk of a payday loan of $500 in order to purchase a brand new appliance.

But the cabin costs such as utility bills food, grocery bills, and fuel costs required to commute to town daily to work do not go disappear. When payday arrives the expenses have gone upand there’s no enough money left to pay back the loan for a short time. The amount due is between $575-$625 due to the finance costs.

The seemingly generous payday loan firm offers a solution. The loan can be converted into an fresh loan for payday loan and then take care of the issue in the next month. It’s all for a modest cost however, which means the due amount is up to $675 or more.

The practices of payday loans are deemed as so shady they are deemed to be so savage that Consumer Financial Protection Bureau has adopted a variety of laws to control how they are dealt with. One of the laws it is working on would include a number of rules for payday loans, such as:

  • A full-payment test that determines whether a person is able to repay the loan in the timeframe while covering their day-to-day costs
  • A 30-day cooling-off time period that will stop anyone from getting an immediate payday loan after they’d had three payday loans consecutive paydays
  • Alternative loan and payment option needs
  • Mandatory reports of payday loans are required for the purpose of requiring the compliance

What is the Payday Loan Trick?

The payday loan trap is when you get trapped in a vicious cycle of there isn’t enough money to repay the loan. Instead, you continue to roll the entire amount into a payday loan, which is accompanied by an additional cost. The amount you owe increases with each cycle, and eventually surpasses the amount you could manage to pay back in just a few weeks or even one month, even if you didn’t have any other costs.

Based on the Consumer Financial Protection Bureau, this is the situation that 60 percent of payday loan borrowers are caught in, but you can get out of the trap. Like any fairytale character trapped in the witch’s home or the monster’s den the key to escape is knowing the resources available to you and how to put them to the best use. There are a few ways to break out from the payday loan trap are:

  • Inquiring about an extension of the payment plan
  • Utilizing a different kind of credit, like a personal loan or credit card to settle the debt to have the ability to manage your balance and can pay it off in the future.
  • You can file a complaint with the Consumer Financial Protection Bureau or state regulators if you think the payday lender is violating the law.

How can you avoid the trap of payday loans?

If you inquire Hansel and Gretel if it would be easier to stay clear of the witch’s oven in the event that they hadn’t eaten their candy, they’ll probably answer yes. It’s also easier to avoid being caught in the trap of payday loans if do not agree to the terms of a payday loan at first.

If you are facing unexpected costs or financial emergencies there are solutions that are available. In most instances when your only alternative is to use a credit card it is best to pay back the debt as soon that you are able to.

Personal loans can also be an option over payday loans when you need to take out a loan to cover emergencies. Take a look at the following examples to understand how the math functions for personal loans.

  • Payday loans are a great option. You can borrow $500, and pay back $575 over two weeks. The loan will cost you 75 dollars in total. Then, you have to pay it all in the near future, which could put you in financial trouble once more.
  • A personal loan is an option. You take out $500 at an interest rate of 14.99 percent and have a loan term that is 12 months. The monthly installment is $35, and you pay 42 dollars in interest. It’s about half the cost of a payday loan which means you just need to make an additional $45 per month to pay your monthly payments. This is a better choice for budgets of all kinds.

Personal loans can need you to take out more than $500 and they require that you have at the very least decent credit. However, if you’re able to choose this route, it’s generally advantageous for you over the long term in the event that you pay the right amount on the remaining balance.

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