How Payday Loans Work
A payday loan is an easily accessible, short term loan that is usually taken out in a few hundred dollars to pay an immediate expense like a car repair or groceries. The nonprofit organization Pew Charitable Trusts says the average payday loan amount is $375, but a payday loan can go up to $500. How payday loans work is that they’re taken out with a borrowing fee and are due in two weeks, the next payday.
To qualify for a payday loan, the borrower must provide the lender evidence of an income source (like a job pay stub) and checking account information, either with a post-dated check or debit authorization.
How payday loans work is really a debt trap for the consumer, which lies in the expense-income discrepancy. The borrower’s source of income hasn’t increased, yet his/her expenses have because the payday loan debt is now added. When the borrower receives the next paycheck, it goes into his/her already existing expenses. This still leaves the payday loan debt unpaid, which is why most borrowers default on their first loan.
Adding to the payday loan debt is a fee the customer is charged to roll the loan over. The borrower is faced with paying one of two costs: the loan principal plus the borrowing fee, or the renewal fee. Most likely the borrower can’t afford the principal and borrowing fee, so he/she opts for the renewal fee, which drags the borrower into unforeseen debt.
The payday loan cycle continues for many months until the borrower has enough money to pay off the balance. By this time, the payday loan debt is at least double the principal because of escalating renewal fees and a high interest rate that goes into the hundreds.
How would the borrower find enough money to pay off the ballooned payday loan debt? He/she finds an extra source of income like requesting a loan from a loved one, pawning off belongings or working a part-time job or overtime at a current job.
Many people don’t know how payday loans actually work until they’re buried under several months’ worth of debt. A March 2014 report the Consumer Financial Protection Bureau conducted says that payday loans trap 80 percent of borrowers in an ongoing cycle of debt.
My Payday Loan Relief speaks to consumers like you about How Payday Loans Work and come up with a debt relief strategy. Our team of financial experts negotiate with lenders to bring down your debt amount while you pay it in monthly portions. Call Now for a Free Consultation at 1-888-958-1787 or fill out the form on this webpage.