When it comes to personal finance, there is usually a great deal of discussion on the high rates of interest charged by credit card companies. What credit card companies charge, however, does not come close to what the payday loan companies charge (this is in no way to excuse credit card companies for charging outrageous rates, just to point out that where there is bad, there is often worse). Loans from payday establishments can top 1000% (unfortunately, that is not a typo). Take a look at the rate disclosure sheet for soniccash.com which charges a rate as high as 1460%:
When it comes down to it, getting a payday loan is one of the worst type of loans that you can ever receive and you’re better off with practically any other alternative you can find. In fact, many people that use payday loans end up in debt traps. Since the vast majority of people that turn to payday loans are those living paycheck to paycheck who need a bit of money quickly (payday loans range from $100 to $1000). What happens is many are forced to repeat borrowing cycles because of the extremely high cost to borrow the money and the short repayment terms (usually 5 days to 2 weeks). In order to pay off the initial loan they take out, they must take out another, larger loan to pay off the initial loan. Once this begins, there is virtually no way to get out of the spiralling debt trap.
One of the biggest problems is that once a payday loan is taken out, the consequences of failing to pay off the loan and make good on the check used to secure the loan is usually far worse than if the loan wasn’t taken out in the first place. In addition to having the payday loan institution report it to the credit bureaus to ruin your credit and using strong arm tactics to try and get you to pay the loan, you will also get bounced check fees from your bank and may lose the bank account all together. This can result in making it difficult to ever get a bank account again.
If you find yourself short of cash, you want to try every conceivable way to avoid taking out a payday loan.