About 12 million Americans rely on payday loans each year to manage income volatility or handle unexpected emergencies. However, while payday loans are used to solve a very real problem, consumers are frequently abused by predatory payday lenders.

Because of limited regulation and lack of better options, it’s not uncommon to read horror stories about people charged in excess of 1000% APR or getting stuck in debt traps.

Once a person is stuck in a downward debt spiral with endless rollovers and hidden fees, they can quickly see their credit harmed and bank accounts emptied, especially if they take a loan from an especially unscrupulous lender.

Payday loan tactics such as hidden fees, rollovers, and unreasonably high interest rates have caused 22 states in the USA to limit payday loans or ban them entirely.

Why do people get payday loans?

Many people simply don’t have any other option. For someone affected by low wages, income volatility or an unexpected emergency, a payday loan might be the only option to bridge their income shortfall. While it may not solve a person's financial difficulties completely, it does provide a temporary solution.

Unfortunately, more than 80% of payday loans are ‘rolled over’ into a new loan or the borrower takes out another loan immediately after paying off their old one.

If a lender doesn’t have policies in place to prevent rollovers and doesn’t offer any flexible repayment options, the financial disaster for most borrowers becomes an unavoidable reality.

What happens to someone stuck in a cycle of debt traps

When a person is unable to repay a payday loan on their first due date, most lenders will typically agree to delay the repayment by charging the borrower a “rollover fee” while the principal of the loan remains unchanged.

Unfortunately, many borrowers are unable to repay their loan for months (and in some cases years).

Very often, the fees will dramatically exceed the actual loan amount, with some borrowers paying thousands of dollars in rollover fees. The only way to avoid debt traps is to stay away from lenders who practice rollovers.

How to avoid the pitfalls of payday loans?

With some basic financial education, it is possible to avoid the dangers of payday loans.

With so many borrowers not having other options, it is crucial to have all the information.

We’ve put together an infographic that will allow you to bridge an income gap with payday loans while avoiding the most common pitfalls of predatory lending.

null

Sources:

The Pew Charitable Trust. (2012). Who Borrows, Where They Borrow, and Why? pewtrusts.org

Economic Policy Institute. (2015). Irregular Work Scheduling and Its Consequences. epi.org

Center for Responsible Lending. (2016). Map of U.S. Payday Interest Rates. responsiblelending.org

Payday Loan Consumer Information. Legal Status of Payday Loans by State. paydayloaninfo.org

Consumer Financial Protection Bureau. (2014). CFPB Finds Four out of Five Payday Loans are Rolled Over or Renewed. consumerfinance.gov

LendUp. LendUp’s Commitment to Social Impact. lendup.com

Experian. What is a Good Credit Score? experian.com

Finder. (2017). Americans Owe an Estimated $184 Billion to Friends and Family Annually. finder.com