Easy Loans Carry a Hard Price – Don’t Let One Bury You in Debt
As long as you have a checking account and steady income, it is tempting to click on one of the dozens of flashing advertisements for easy loans and it does not take much to get lured in. Many lenders do not require credit checks, which means you won’t get an inquiry ding on your FICO score. You also have the money in hand within hours of applying for these easy loans. These unsecured lines of credit are billed as a hassle-free way to quickly pay off an unexpected or emergency financial obligation.
The Lure of Easy Loans
When you are denied funds from a traditional lending source because your credit credibility is shot or you need temporary cash flow until the next paycheck, easy loans might seem like the perfect solution to get you through a tight financial situation. Taking out an advance on your next paycheck from a money lender may be your only alternative if you do not have a credit card or money in a savings account to cover the expense of a car repair or catching up on your electricity bill before services are shut off.
While most people have the best of intentions of catching right back up with their next check, the reality is that few can afford the hefty lump-sum payment needed to settle the entire balance of these easy loans just two weeks later. The Pew Charitable Trusts estimates that 12 million Americans take out payday easy loans every year. Earning roughly $30,000 annually, the average borrower of a short-term, small-dollar loan stays in debt for five months for a temporary loan of just $375. By the time the bill is finally paid off, $520 in fees are commonly shelled out.
Once a borrower is trapped in the cycle of debt, what once looked like an easy way out of a bind becomes an overwhelming unaffordable way to handle financial obligations. Before hitting submit on that application, there are a few things you should know about these easy loans so that you do not get sucked into a vicious cycle of borrowing more and more money to cover daily living expenses.
The Downside of Easy Loans for Bad Credit
Predatory lending practices contribute to a much higher loan default rate, which costs American consumers $9 billion each year, Pew calculates. Most states have enacted laws that limit excessively high interest rates and cap loan limits based on income to discourage a cycle of debt. However, the term “excessive” is relative since a typical loan is charged an APR of 391 percent.
While payday easy loans are primarily designed for unexpected expenses, Pew reports that 7 in 10 borrowers rely upon cash advances to cover basic expenses, such as rent and utilities. The average plan for a payday loan requires a $430 lump-sum payment, which equals 36 percent of the average borrower’s paycheck. Since rent alone is generally limited to 25 percent of a person’s gross salary, it is understandable how paying back these easy loans becomes an almost impossible task. The CFPB attributes three-quarters of the renewing payday loans are taken out by people who average 11 or more loans each year.
Easy Loans for Bad Credit Can Suck You into a Cycle of Borrowing
Both the Center for Responsible Lending (CRL) and the federal Consumer Financial Protection Bureau (CFPB) have released research stating that predatory lenders “depend on keeping vulnerable consumers trapped in an endless cycle of debt.” Additionally, a 2014 report released by the CFPB found that four out of five payday loans are extended within 14 days, and roughly 60 percent of loans are rolled over more than seven times.
Each time a borrower is unable to repay the loan in full at the end of the term, additional fees are stacked on top of the debt. Since lenders also have access to checking accounts to process payments, insufficient fund charges can quickly rack up. CFPB Director Richard Cordray noted that borrowers of these payday easy loans are at higher risk for losing their bank accounts, falling behind on their other debts and declaring bankruptcy.
Tips to Avoid Getting Buried in Debt
The most important way to avoid getting buried by debt is to stay far away from easy loans that do not set limits on fees, have a clear repayment timeframe or consider your true ability to make the agreed upon payment. The safest short-term loans should have a repayment plan of six months and installments should not exceed 5 percent of your income, recommends Pew. When you must take out a payday loan for budget shortfalls, it is crucial that you only borrow what you can afford to pay back with your next paycheck.
It is also vital that you have a strategy for paying off your debt. Many credit advisors recommend paying off balances with the highest interest rates first and then working your way down in order to get out of debt more quickly. Others advise tackling the smallest balances first to get rid of interest fees and increase monthly cash flow. Once a smaller debt is paid off, then you can shift the payment to the next creditor. This strategy lets you quickly pay down the principal so that you are wasting less money on interest fees.
In order to ensure that you have a safety net to cover unexpected expenses, you must start investing in a nest egg. Even if you put away just $20 per check, work toward saving the equivalent of one paycheck. Once you reach your first goal, then the next step is to save up enough money to cover your household expenses for two months, advises Credit.com.
Finding Help When You are Buried in Debt
If you are constantly shuffling around money to cover monthly payments, then there is a deeper issue that you need to address. Continually renewing easy loans online for these obligations is really costing you more money over the long-term. Contact your loan providers to ask if you qualify for any special programs, restructured repayment terms or lower interest rates.
There are reputable law firms and non-profit debt management services that can help you negotiate with creditors to reduce interest rates or waive penalties. These businesses can also assist you with setting up a manageable budget. Promises that predatory companies cannot deliver on include instantly improving your credit score and settling debts for a fraction of the outstanding balances. It takes time to rebuild credit, and loan forgiveness programs have stringent rules and important tax consequences. The biggest red flag that you are being targeted by a predatory agency is if you are charged a fee for services.
The Personal Money Store is another trustworthy resource for connecting with reputable lenders who offer cash advances, short-term installment loans and personal even if you have a history of bad credit.