One of the reasons why consumers are sometimes warned of the dangers of payday loans is because there is a tendency for customers to apply for them even when they cannot afford them.
If you take out a payday loan which you cannot afford to pay back on time, you may find yourself borrowing money again to pay for the loan and interest. At this point, you can sink deeper and deeper into debt.
The key to preventing this is to make sure that you can afford the loan you are considering. To do this, you will need to calculate the total amount of interest which the credit will accumulate over its term and add on the principal. You also need to account for any fees which may be charged as part of the lending process.
Once you know the total amount, you’ll need to calculate how much money you expect to have available to repay the loan when it comes due.
So imagine that you are waiting for a late paycheck for example. You’ll need to run the calculations above and check to make sure that your next paycheck will cover the entire amount due on loan on time.
Most consumers who fail to pay back their payday loans have either incorrectly calculated the amount that they will owe, or they have used the loans in inappropriate situations.
If for example you have just lost your job and you do not know when you will have more income, a payday loan is not a suitable option for paying your rent. It may solve your short-term problem, but will likely become the source of a long-term problem.
Trustworthy lenders that operate with transparency and responsibility will ask you to verify your income to help you avoid situations like this which can result in debt spirals.
Reviewed by: Casey Bond
Date Reviewed: Mar 28, 2019