Payday loans can be much worse than credit card debt and if you aren’t careful, it can quickly consume your finances. Unfortunately, many people still continue to use payday loans even though they can be incredibly detrimental. When it comes to ensuring your financial stability, any type of debt should be avoided. Paying in cash for virtually everything you do is an economic standpoint that never fails. Below, you will find reasons why payday loans are worse than credit card debt and why you should steer clear of them.
Payday loans have substantially higher interest rates than credit cards
A payday loan has a 150% to 500% APR. This stands for annual percentage rate and it refers to how much you will be charged in interest in an entire year. Of course, payday loans only take about a month or two to pay off, so you will not pay anywhere close to this interest rate. However, that’s exactly the problem with payday loans. Credit cards have an APR of about 15-20%. It’s far more affordable to accumulate debt on your credit card than it is to take out a payday loan.
Payday loans have to be repaid quickly
Payday loan companies generally require that their clients begin to make payments within about one to two weeks after taking out the loan. This may sound like a graceful amount of time to provide, but they actually require that the entire loan be paid off very shortly after this. That means if you take out a $300 loan, you will have to repay the entire loan plus interest within one week to a month. This helps you save money because the longer it takes you to pay off the loan, the more interest you pay. Essentially these payday loans are good for those that need to pay bills in the short term. However, it’s not beneficial to your budget when you could easily use credit cards and pay less interest altogether.
Payday loan companies encourage repeat business
If you take out a loan from a payday loan company and you are struggling to pay it off, they will likely encourage you to take out another loan. This is what some call the payday loan trap. It refers to being stuck in a trap with the payday loan company where you feel ineligible to get out of debt. The continuous loans that you take out will be digging a deeper hole and making your finances dependent on your loans.