Payday loans are financial quicksand: many borrowers are unable to repay the loan in the typical two-week repayment period. One of the biggest pitfalls that can occur with payday loans is when a borrower enters a cycle of repeated loan extension. They are unable to repay the loan on payday, so they extend the loan for another repayment period. They continue to spend borrowed money and, in the meantime, fees continue to accrue.
It is a vicious cycle that can continue indefinitely, since there is no limit to the number of times a person can get this type of loan. It's hard to find yourself in a situation where you need money right away, but you're not alone. In fact, 42% of millennials have used methods such as payday loans as a way to deal with debt, according to a study by the Global Financial Literacy Excellence Center at George Washington University. Approximately 75% of payday loans extend to people who apply for 11 or more loans a year, according to CFPB data.
Unfortunately, many people are unable to repay their payday loans when they are due, so they consolidate borrowed funds into a new loan and create a debt cycle. Unlike a car title loan, a traditional auto loan, or a mortgage, payday loans are not secured. This means that if you don't pay (don't pay), the lender cannot seize your property as a result. You should understand that there are other loan options available to you, known as Alternative Payday Loans (PAL), even if you have bad credit.
Similar to medical debts, payday loans generally only report your debt to credit bureaus if they are sent for collections. While credit cards get a bad reputation for having high interest rates, their rates are a small fraction of what you end up paying for a payday loan or title loan. Other states do not have specific provisions for payday loans or require lenders to meet interest rate limits on other consumer loans. Payday loans are sometimes harder to repay than a traditional loan, because the lender didn't verify your ability to repay before lending you money.
Some versions of payday loans in some states allow you to obtain lower interest loans that can be paid in installments and that report to credit bureaus. Many payday lenders ask you to write a post-dated check, that is, in this case, a check dated to be cashed after your next payday, when you get the loan. The problem with this payday loan alternative is that you often have to be a member of the credit union for at least a month before you apply for this short-term loan. Asking if title loans or payday loans are better is tantamount to asking which illness is best to catch in winter.
Last but not least, payday loans don't help you build credit because they don't usually report to credit bureaus. Like payday lenders, title lenders impose the largest expenses when you don't repay the loan on time. Your employer can offer this in emergency situations, without charging fees associated with payday loans. Classifying one or the other as better is fraught with difficulties, as both payday loans and title loans tend to worsen a precarious financial situation.