If you struggle to pay your bills, you may turn to costly loans that charge up to 400% interest. These so-called payday loans typically make it even harder to get out of debt and turn your financial situation around.
Review the pitfalls of payday loans and explore other possible debt solutions.
The real cost of payday loans
The average annual percentage rate of this type of loan is 300 to 400% interest. In comparison, the average high-interest credit card tops out at a 30% APR, while a personal loan has a maximum APR of about 25%. The excessive interest rate makes it almost impossible for consumers to repay these loans. A study from Pew Charitable Trusts indicates that Americans spend an average of $7 million a year on payday loan fees. These lenders tend to prey on low-income employees who cannot make ends meet despite having several shift work positions.
The payday loan trap
Most people who take out payday loans end up rolling the balance into another loan and multiplying the interest and fees. This mounting debt makes it difficult to break the pattern, making the individual’s financial situation worse and decreasing the chances of recovery. According to the federal Consumer Finance Protection Bureau, 80% of payday loans result in the borrower taking a second or subsequent loan.
Bankruptcy helps many consumers stuck in the cycle of expensive debt that becomes impossible to repay. Contrary to popular myth, people who file for bankruptcy can often keep their homes, cars and other assets while getting relief from rising bills.