A payday loan is actually there to help you solve your financial problem, but it also can lead you to a lot of other problems if you don’t manage your budget carefully. You should know however that because these are small, short-term loans, the Annual Percentage Rate (APR) is quite high. So, often payday loans become a trap. It is not used on a one-time basis as suggested but extended to next payday due to the extreme high cost to borrow and the very short repayment term.
Payday loans are made to look so attractive so you are tempted to keep borrowing rather than saving what you have. Cash-strapped borrowers are rarely able to repay the entire loan when payday arrives, because they need the new paycheck for current living expenses. So you are also tempted to rollover or refinance one payday loan with another.
The other thing which will lead you into trouble is when you can’t pay back your loan and default on the payday loan. If you default it can cause many problems for you, like extra NSF fees from both your bank when the payments bounce. The payday loan company may also send your account to a third party collections agency, which could be very detrimental to your long term credit options. In addition, your default will be reported to consumer credit agencies that can make it impossible for you to obtain another payday loan or even open a new checking account in the future. Some payday loan company will also take defaulting clients to court and sue them.
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