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Payday loans can be risky. According to a study from the Center for Responsible Lending, 50% of payday loan borrowers default within two years of taking out the first loan. Not to mention, the average payday loan borrower is in debt for five months out of the year and ends up repaying more than $500 in fees.
In this article, we will tell you exactly what a payday loan is, what will happen if you default, and what better options are out there for quick cash.
What Exactly Is A Payday Loan?
A payday loan is a short-term loan you can borrow without having your credit checked.
The amount you borrow is due back within 14 days, or when you get your next paycheck (hence the term payday loan).
Defaulting On Payday Loans
Once the payday loan is due for repayment, the lender will contact the borrower or draft the outstanding balance from the borrower’s bank account. This can mean trouble, though. If the bank account has insufficient funds, the borrower will have to pay an overdraft fee each time the lender tries deducting the loan amount.
If the lender cannot draft the balance from the borrower’s bank account, they’ll begin contacting the borrower. While the payday loan is still outstanding, it will rack up fees, interest, and even penalties. Lenders will try to collect for about 60 days before turning the loan over to a collection agency. Collection agencies are known to be more aggressive than lenders when seeking repayment.
How To Avoid A Payday Loan Mess
Once collection agencies get involved, the borrower’s credit suffers. What’s more, is that borrowers can even be sued for outstanding payments.
It is advised people exhaust all efforts before initiating a payday loan. Whether it’s borrowing money from family or selling off your jewelry to a local pawn shop, try to get quick cash any other way than a payday loan to avoid this mess entirely.