What is a Payday loan and why you should avoid it

Payday loan- the 'fast and easy" trap

The world is going to end not because of an environmental disaster, but because of the ignorance of people. Please don’t consider me rude, I’m just honest, brutally honest. Oh, by the way, I am Finstein. I come from a planet called Finomena. No, I am not a twin of the scientist you know, but when it comes to being a genius at something, you can say I’m similar to him.

I know everything related to finance – all that exists and all that doesn’t, all the Dos and all the Don’ts, all that you should know but you don’t. And I don’t brag. I love talking to people and making them at least a little financially smarter than they were before meeting me. I am trying to eradicate financial stupidity from the face of earth.

Payday loan

So, I was just doing some research on the type of credit options available, and I stumbled upon one called ‘Payday loans’. I was totally appalled! In fact, I was sad. I was cursing the one who thought of creating such loans, when I realised that a lot of individuals are in support of these loans and find them to be a huge help in the time of need. It then hit my patience threshold, and I decided to make people aware of what they’re happily getting themselves into, by explaining what is a payday loan.

But, what is a payday loan?

What is a payday loan

Payday loan is a short-term loan which can last for eternity. We have all been through times when there is an urgent need of some extra money, and the payday (the day you get your salary) is too far to wait for it. That’s when we start searching for a source which can save us from this immediate trouble. Now, there are always going to be some cunning people waiting for you to get into such a situation, and use it to their advantage. Payday lenders are masters of this art. They provide you loan for a short tenure like 7 days, 15 days, 30 days etc., at huge interest rates.  Now that you have an idea about what is a payday loan, do you not wonder why people go for it?

Is need the mother of a bad decision?

Is payday loan a bad decision?

At first, I immediately started disliking the people who took payday loans, as it was not the smartest financial decision they could have taken. I wondered why would people even go for such a loan, it’s clearly a terrible deal. Most of them don’t even do a little research on what is a payday loan, which is unfortunate given this is an important financial decision. But then I felt bad for them being gullible. They had been led into a rattrap, I mean, debt-trap.

Imagine yourself standing in a desert all drained and thirsty, when someone offers water on a few conditions. Would you even slightly care to know about those conditions? No, you will be ready to do anything it takes to pour it in your mouth till the last drop. The situation is similar, the water is cash. When there is an absolutely urgent need, you won’t think of the ‘How?’, but want money from wherever you can at no matter how high the interest rate is.

To lure you into it, payday loans are marketed as a ‘fast and easy’ solution. It is so fast that you do not even get time to think about all the pros and cons. Well, that’s the whole idea.

All that’s wrong!

All that's wrong about Payday loan

Payday loans come with an interest rate that seems to be quite less, but is monstrous if you look closely. You tend to accept it because of the situation you are in, and in the hope that once you get your paycheck, you will repay it all. Many of the payday lenders give loans on interest rates similar to 1%/day, which is ~365%/annum. Studies show that individuals have paid as much as ~700% interest rate towards payday loans, and still couldn’t pay the entire amount back. Wow! Stats also show that 75% of the people who took a payday loan, took another one to repay it.

Assuming you repay your payday loan on time, it still disturbs your monthly finances. You do not even have enough savings, or else, you would not opt for the loan. Falling short on paying bills and other expenses, you once again need a source, and why not the old friend ‘payday loan’ then? Here it all begins, you take one loan to repay the previous one and it goes on. And here, my friend, you are stuck in a cycle — the debt cycle. No matter how hard you try, it becomes really difficult to get out of it, unless you win a lottery all of a sudden, which is again as unlikely as you going for the loan just once.

Avoid, before it leaves a void

Avoid payday loans

At Finomena, we teach everyone to spend wisely. Our people and all those who come to visit us, buy stuff on efficiently managed EMIs, and develop a good credit behaviour. Imagine them taking a short-term loan to buy a mobile phone of their choice, and proceeding towards the trap. We don’t let that happen.

You might argue that you wouldn’t go for a payday loan if you had other options. Really? Or, you just opted for it because it seemed to be an easy option? Instead, in such situations, you could try borrowing money from friends and relatives. This would at least give you some time to pay it back and you would not get slapped by the huge interest rate as well. Cash advance on credit card, advance pay from employer, a small loan from non-profit groups in community etc. are other options.

The point is, don’t let the emergency blind you. Whatever is the kind of loan you go for, think well before taking it. Weigh all the factors, and have a plan to pay it back without disturbing your finances. The best you can do to avoid all this is, save more! Start saving if you haven’t already. Living life paycheck to paycheck can get you in a serious trouble. At this point, I’m sure you’re feeling a little more financially smarter. Help others as well. The next time someone asks ‘What is a payday loan?’, you know you’ll need to immediately add ‘Why you shouldn’t go for it’ to the question!

One last piece of advice – every time you see an ad which says “Fast and easy cash”, run away as fast as you can.