The Dangers of Payday Loans



June 2, 2022

For many Europeans, managing finances is a paycheck-to-paycheck way of life. Even those who carefully balance their expenses with tight incomes can easily run into trouble when unexpected events arise.

When people face emergency expenses like car repairs or hospital visits, but they don’t have the cash on hand to pay for them, they’re forced to look for a way to make ends meet. Payday loans are one quick-fix option to pay for life’s unexpected necessities.

These short-term loans, also called cash-advance loans, work by providing an immediate loan for an amount based on a portion of your expected paycheck. The lender considers the amount of the borrower’s wages and their credit risk when they issue the loan, which typically comes with a term of 30 days.

Payday loans can indeed offer people immediate relief, but they come at a high cost, and one that could be more damaging to their long-term financial stability.

How Payday Loans Can Cause Harm

In general, payday loans are considered predatory because they take advantage of desperate situations by charging a high interest rate that can trap borrowers in a cycle of debt.

Sometimes, borrowers can get trapped in a cycle of taking out another payday loan to fund the fees and expenses of their original loan. Obviously, that situation has several destructive effects on a person’s financial health, including preventing them from saving and increasing their expenses. If you’re trapped in a payday loan cycle, it can be very difficult, if not impossible, to pay off your debts and put your money toward long-term goals like buying a house or a new car.

1 in 5 borrowers will end up taking out ten or more payday loans in succession before finally being able to pay them back. It is a never-ending cycle of debt. 

How to Avoid Needing a Short-Term Loan

Why do people take out short-term loans? A Pew survey showed that most borrowers use short-term or payday loans to cover regular, recurring expenses. In this case, a payday loan is nothing but a bandage fix. Without fixing the root cause of the issue, you end up feeding into the never-ending cycle of debt. So, how do you address the root cause? Here are some ideas.

Develop a Stronger Budget

Use a budget tracker to break out your monthly expenses and analyze where you can cut back. See which monthly services you really need and even negotiate payments where you can. Avoid eating out and impulse buys.

Additionally, sit down and write out when all your bills are due and which ones charge late fees. Some may accept late payments without reporting the late payments to credit agencies or charging major fees. 

Pay Back your Debt

Depending on the size of your debt, simply writing out all your balances and allocating a bit of cash each month to gradually pay them back may be enough (consider auto-pay, where available). If you feel your debt has spiraled out of control, consider negotiating with your creditors to lower your balances and/or set you up on a payment plan. Some creditors may even let you pay a lump sum in exchange for forgiving the rest of your debt. 

Save Up

Even if you are living paycheck to paycheck, you can still save! Cutting back on impulse buys and eating out, couponing, downsizing, minimizing subscriptions, and reducing transportation expenses, are just some ways to save on a low-income.

Make Extra Cash

Whether you take on gig work, freelancing, ridesharing/delivery, taking online surveys, one-off handyman work, babysitting, housekeeping, etc., there are many ways to make extra cash and still maintain control over your schedule.

Alternatives to Payday Loans

On-demand pay (also known as early wage access) is the best alternative to payday loans. If you have access to an app like Rain, you can get part of your money any day instead of having to wait for payday. 

Through Rain, you can withdraw your funds for a fair and transparent monthly subscription fee to access the app service. That means you don’t have to pay interest or hidden fees just for using your funds early.