Avoid Payday Loans When Repairing Your Credit
Posted on September 28, 2010
Repairing credit often takes an extreme focus on allocating monies earned towards debt payoff. For some people who are already finding it hard to get by each paycheck, it can be easy to end up with nothing to live on several days before the next payday. Having not many options to survive until then, people have turned to payday loans as a means to get by until your next check is available.
Why Payday Loans Hurt
The problem with payday loans is not immediately apparent to those in need. They see a way to get quick cash with the worry of a credit check. Their focus is on the money at the end of the transaction and not necessarily the consequences that present after the deal is done.
When you take a payday loan, it is true you do get cash almost immediately. It is also true that payday lenders do not require a credit check. Essentially all you need to get a payday loan is proof of identification, proof of employment, and a bank account. Show up with your driver’s license, pay stub and a blank check and you’ve got yourself a loan.
However simple it seems, payday loans have a darker side. The contract you sign to ensure the loan contains terms and conditions people often fail to read. By signing the agreement, a borrower is promising to pay back the amount of the loan plus up to 500% interest in some cases. Would you even consider a credit card at that high rate of interest? Never. Borrowers must then write a check the lender will hold until your next payday. When the check is cashed, you are out the cost of the loan and all of the interest at one time.
Basically payday loan borrowers are borrowing against their income and throwing in several hundred extra dollars to the lender. It becomes a vicious cycle because borrowers who are already short on cash before payday will likely again become short on cash after paying the lender. The vicious cycle can continue as the borrower realizes they gave away most of their income paying back the loan and fnd once again they are in need of extra cash.
Debt Focus Lost
Eventually, the loan cycle will get the better of borrowers who soon will not be able to allocate money towards debts. They are putting more cash in the pockets of the lenders and will find it hard to break the cycle. By missing debt payments, your credit is certainly no longer on the road to repair. The borrower once again sets down the road of despair.
Breaking the Cycle
While it a good intention to devote as much cash as you can afford towards eliminating debts, it is essential you are only allocating what you can afford. Institute a budget to better manage your money. If you can come up with a reasonable budgetary guide, consult with a debt specialist who can analyze your income and expenses and recommend a better way.
Instead of passing your hard-earned cash over the payday lenders, make a habit of paying yourself $25 or $50 each month to be deposited into a high yield savings account. Build the fund so you will always have a resource outside of payday loans for quick cash and avoid payday loans and other debts in the future in order to repair your credit.
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