I know what loans are but what makes them so much worse?
Edit: thank you everyone for Answering! I think I got it now 🙂
In: 32
Generally, short term loans usually only intended to be carried until the borrower’s next paycheck.
Problem is that they tend to be inherently predatory since someone who has no other way of borrowing funds likely is in a position where they can’t pay back that amount the next week or so, and may end up with little choice but to roll the unpaid balance into another payday loan
The interest/fees often charged on these kinds of loans, if expressed annually, often will be well above 100% APR: someone routinely carrying debt from these kinds of loans will be paying huge amounts of interest over time, creating a cycle that can be *very* difficult to escape.
It’s a short-term loan with a high interest rate.
It’s hated because of the high interest rate, and because it’s marketed at people who can’t get loans or credit from most other sources because those other sources know they have a high probability of not being able to pay it back. While those sources are refusing the loans/credit for their own self-interest, it’s also not in the interest of the person asking to get a loan they can’t pay back.
The basic idea is that people who are desperate for money will take out a short-term loan from a company where they charge a lot of interest, so that they can have money before their next payday. The trick is that these companies who provide payday loans know that the poor people who need their services are desperate, and can charge lots and lots of money.
Let’s say that you need to borrow $500. When all the fees that they add have been put into the loan, you now might end up owing $1,000 total that you’re paying off slowly over time. Which is incredibly harsh for people who are struggling and poor, the sort of people who need these loans in the first place.
Payday loans are easy to apply for and get approved for as long as you have a reliable paycheck. People hate them because they’re super predatory with a system designed to keep you dependent.
Example: you borrow $500 until your next paycheck. Then you have to pay back $575 because of interest. Which then leaves you having to borrow again to get through the next two weeks, the cycle continues, etc.
They’re predatory because they’re marketed towards people with credit too low to access traditional lending with reasonable interest rates. And then they abuse that power by spiking the rates which make it impossible to get out of the cycle.
My credit score is 720 – I have access to loans at 8% interest. Someone who’s credit score is 520, doesn’t so when they’re short on money all they can do is turn to payday loans that charge 120% interest. And they’re stuck in that loop with no way to get ahead.
Generally, short term loans usually only intended to be carried until the borrower’s next paycheck.
Problem is that they tend to be inherently predatory since someone who has no other way of borrowing funds likely is in a position where they can’t pay back that amount the next week or so, and may end up with little choice but to roll the unpaid balance into another payday loan
The interest/fees often charged on these kinds of loans, if expressed annually, often will be well above 100% APR: someone routinely carrying debt from these kinds of loans will be paying huge amounts of interest over time, creating a cycle that can be *very* difficult to escape.
Payday loans are easy to apply for and get approved for as long as you have a reliable paycheck. People hate them because they’re super predatory with a system designed to keep you dependent.
Example: you borrow $500 until your next paycheck. Then you have to pay back $575 because of interest. Which then leaves you having to borrow again to get through the next two weeks, the cycle continues, etc.
They’re predatory because they’re marketed towards people with credit too low to access traditional lending with reasonable interest rates. And then they abuse that power by spiking the rates which make it impossible to get out of the cycle.
My credit score is 720 – I have access to loans at 8% interest. Someone who’s credit score is 520, doesn’t so when they’re short on money all they can do is turn to payday loans that charge 120% interest. And they’re stuck in that loop with no way to get ahead.
It’s a short-term loan with a high interest rate.
It’s hated because of the high interest rate, and because it’s marketed at people who can’t get loans or credit from most other sources because those other sources know they have a high probability of not being able to pay it back. While those sources are refusing the loans/credit for their own self-interest, it’s also not in the interest of the person asking to get a loan they can’t pay back.
The basic idea is that people who are desperate for money will take out a short-term loan from a company where they charge a lot of interest, so that they can have money before their next payday. The trick is that these companies who provide payday loans know that the poor people who need their services are desperate, and can charge lots and lots of money.
Let’s say that you need to borrow $500. When all the fees that they add have been put into the loan, you now might end up owing $1,000 total that you’re paying off slowly over time. Which is incredibly harsh for people who are struggling and poor, the sort of people who need these loans in the first place.
Payday loan companies have been referred to as legal loan sharking.
Payday loans are shot term loans, the idea being that you can borrow money to hold you over until your next payday when you can pay it off, hence the name.
They have a bad reputation because payday loans are predatory. They focus on people in financial trouble with poor credit and have very high interest often over 100% annually. They are meant to prey on people with bad finances and/or have poor financial management skills who are very likely to be unable to pay the loans back or don’t understand what they are getting themselves into.
Failure to pay back such a high interest loan will result in a debt spiral that’s very hard to get out of. You have to keep re-borrowing money from them just to pay off the interest.
My former boss used to work for one of these companies and mentioned the slogan used by management was ‘forever in debt’ because that’s what they are aiming for with their clientele…
Most of the comments are close but off (at least here in Canada)
They’re meant to be short term loans that you pay back on your next payday with a high interest rate (roughly 15% depending on your province)
While it’s now illegal to do a rollover (just pay the interest and reloan again. Basically stuck in a cycle of paying only the interest) what a lot of ppl tend to do is either pay it off and reborrow – meaning yoyre paying that high interest rate on each of your paydays, or do a separate payday loan elsewhere to pay it off. Now you have more loans to pay.
And it becomes a vicious cycle like that where it’s hard to get out.
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