The most obvious problem with flash loans is their extremely high interest rate. The payment for a payday loan can vary from $ 10 to $ 30 per borrowed $ 100, which corresponds to an annual interest rate of 261% to 782%. But these loans also have other dangers that are less obvious.
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These dangers include:
- Extension costs . When borrowers cannot pay back a payday loan on time, they renew the loan or take out a new loan. So even though they continue to make payments for their loans, the amount they owe is never smaller. A borrower who starts with a $ 400 loan and an interest payment of $ 60 and then continues to extend the loan every two weeks for four months will pay around $ 480 in interest – and will still owe the original $ 400.
- Collections. In theory, a payday provider should never have trouble collecting a debt, because he can withdraw the money directly from your bank account. The problem is that if the bill is empty, the lender gets nothing – and you get a hefty bank fee. But the lender usually doesn’t stop with one attempt. It keeps trying to collect the money, so the payment is often divided into smaller amounts that are more likely to continue. And at the same time, the lender is bothering you with phone calls and letters from lawyers. If none of that works, the lender will probably sell your debt to a dollar collection agency. This agency can not only call and write to you, but can also sue you for the debt. If it wins,
- Credit Impacts . Payday lenders generally do not check your creditworthiness before you provide a loan. For such small loans with such short terms, it is just too expensive to carry out a credit check on each loan. However, if you do not repay your loan, the credit bureaus can still find out. Even if the lender does not report it, the collection agency that buys it will often cause damage to your credit score. But if you pay the loan on time, that payment is probably not reported to the credit bureaus, so your credit score will not improve.
- The cycle of debts . The biggest problem with flash credits is that you cannot pay them off gradually, such as a mortgage or a car loan. You have to think of the entire sum, interest and principal, in just two weeks. For most borrowers, a lump sum of this size is more than their budget could possibly handle – so they simply renew their loans or take out new loans. According to the Consumer Protection Agency, around four out of five payday loans are renewed or switched to a new loan.