While there are instances where payday loans are an appropriate means of securing emergency funds on a short-term basis, these loans are more often designed to prey on vulnerable individuals who are already caught in dire financial straits. Payday loans can set up a vicious cycle in which borrowers are trapped and plunged deep into crushing debt that they cannot possibly hope to repay anytime soon. Educating yourself on the dangers associated with payday loans can help you to avoid this common financial pitfall as a response an already negative financial situation.

Vicious Cycle

The typical cycle that a payday loan sets up for borrowers who are already in financial trouble is as follows:

• Spend more money each month than you make.
• Borrow to make ends meet.
• Use a large amount of next month’s income to repay payday loan.
• Borrow more to make up for payday loan repayment plus usual expenses.

The Root

As you can see from the above payday loan cycle, the root issue most commonly associated with the abuse of payday loans is spending more than you earn every month. To rectify this situation, it is imperative that you create and maintain a realistic budget that allows you to spend only what you have left over after meeting your core expenses every month. In order to adhere to a budget you must have a firm grasp of:

• Your actual monthly income
• Your actual monthly core expenses
• Your expendable (i.e. extra) cash
• Your future financial goals (i.e. savings targets)

The Deception

The deception involved with payday loans is in the faulty belief that they are easily repaid because you can simply have the amount owed withdrawn automatically from your bank account when your next pay period arrives. The problem with this deception is that payday loans require you to repay not only your principle amount borrowed but also a hefty up-front fee or interest rate. In order to pay off this inflated amount, most individuals already experiencing financial difficulty must dip into monies allocated for the most basic of monthly expenses.

The Truth

In the midst of crisis, it can be difficult to think rationally about all the expenses associated with payday loans, as any solution that relieves immediate pressure seems like a good one. However, understanding the negative cycle that payday loans initiate can save you a good deal of financial grief.

In truth, you would do better to prioritize your most pressing financial obligations and logically ascertain whether the late fees you may incur for such bills as energy and telephone will actually be more than the cost of taking out a payday loan to cover them. If you are in need of larger amounts of money, you may want to consider taking out a short-term loan from a credit union, as these financial institutions typically charge substantially lower interests rates than payday loans.

Many payday loan companies are nothing more than a predatory lending trap for individuals that find themselves in tough economic situations. Avoid them if possible and utilize strict budgeting and less inflated loan options to make ends meet.