Last Updated on July 1, 2024 by admin
While some people may count debt as a no-go area, some individuals count it as if it is part of life. This is a very bad idea, as debt shouldn’t be taken as a normal thing in life. The term ‘payday loan’ is used to describe an integral example of bad debt. You may be wondering if there is any term like ‘good debt’, yes there is! And this article is going to shed more light on all those confusions.
What is Debt?
Debt can be defined as an amount of money borrowed by one party from another over a stipulated period of time. It is an instrument used by individuals and enterprises to make large purchases which they could not afford under normal circumstances.
An agreement of debt gives the borrower the permission to bear the possession of the borrowed item under the condition that it is is to e paid back at a later date, usually with interest.
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Debt can be classified into four main categories; secured, unsecured, revolving, or mortgaged. But the focus of this article is going to be on good and bad debt as payday loan fall under the bad category of debt.
In a loan agreement, the amount borrowed, the attached interest, and the return day are stipulated therein. The interest rate is always expressed as a percentage of the loan amount.
The significant of an interest is to serve as a compensation for the lender who take the risk of lending out the money and to encourage the borrower to pay the money as early as possible so as to minimize his total interest expense.
Types of Debt
There are two types of debt asides from the once categorized above. The category is based on the usage of the borrowed money. They are; good and bad debt.
Good Debt: This is a situation whereby a borrowed amount of money takes dividends in the nearest future. This type of debt is considered to be good and it include; student loans, mortgages, and small business loans.
Bad Debt: Bad Debt is a situation whereby you are taking money from your future self to spend more today. An example of a bad credit is the act of pulling our one’s credit card in order to afford a football ticket. Generally, any debt that wouldn’t bring any future fortune but only funds the present lifestyle is considered a bad debt. Some types of bad debt include; auto loan, credit cards, and payday loans.
Payday Loans
Payday Loans is a prominent example of a bad debt. They are usually small-dollar loans which falls under $500, that are due at one’s next payday. Many states in the US prohibit this type of loan as it is the most expensive of its form.
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Reasons Why you should avoid Payday Loans
1. High interest rates: Payday loans often come with extremely high interest rates, which can make them incredibly expensive to repay. The annual percentage rates (APRs) on payday loans can be as high as 400%, making it difficult for borrowers to pay off the loan in a timely manner.
2. Short repayment terms: Payday loans typically have to be repaid within a short period of time, usually within two to four weeks. This can put borrowers in a difficult position, as they may have difficulty repaying the loan in such a short timeframe, which can lead to a cycle of debt.
3. Hidden fees: Many payday lenders charge additional fees on top of the high interest rates. These fees can include application fees, origination fees, and even fees for late or missed payments. These extra costs can add up quickly and make the loan even more expensive.
4. Risk of predatory lending: Payday lenders often target vulnerable individuals who are in desperate need of quick cash. They may not fully disclose all terms and conditions of the loan or may engage in aggressive collection practices if the borrower is unable to repay the loan on time. This can lead borrowers to fall into a cycle of debt, constantly taking out new payday loans to repay previous ones.
5. Impact on credit score: Taking out a payday loan can negatively impact your credit score if you’re unable to repay it on time. Late payments or defaulting on a payday loan can be reported to credit bureaus, making it more difficult for you to obtain credit in the future.
6. Lack of financial education: Payday loans can be tempting for individuals who are in immediate need of cash and lack access to traditional forms of credit. However, they often do not provide the necessary financial education and resources to help borrowers improve their financial situation in the long term.
7. Alternative options available: There are often alternative options available for individuals in need of quick cash, such as borrowing from family or friends, negotiating with creditors for more affordable payment plans, or seeking assistance from nonprofit organizations that provide financial counseling and support.
Overall, payday loans should be considered as a last resort due to their high costs, short repayment terms, and potential for trapping borrowers in a cycle of debt. It is important to carefully consider all other options and fully understand the terms and conditions of a payday loan before accepting it.
