Falling into the debt cycle is sometimes associated with getting a payday installment loan. Many borrowers blame payday installment loans of leading them into a cycle of debt because of the short duration of time for repayment.
Why do borrowers blame lenders, when in fact they are the ones who ask for money to help them with their cash needs? Also, legitimate payday installment loan lenders assess the ability of their borrowers to repay the loan before lending money to them.
Sad to say, many lenders are accused of granting loans that make borrowers unable to afford to pay off their loan. But the truth is, borrowers are the ones who keep on coming back for loan extensions because they are late with their loan payments.
In a study of the payday lending industry, it showed that three quarters of payday lending volume is generated by churned loans. The short repayment term of payday installment loans frequently forces borrowers to take out another loan before payday. Generally, to obtain a payday installment loan, a borrower gives a payday lender a postdated personal check or an authorization for automatic withdrawal from the borrower’s bank account. In return, the borrower receives cash, less the lender’s fees. The lender, on the other hand, holds the check or electronic debit authorization for a week or two, usually until the borrower’s next payday. When the time for the loan repayment is due, many borrowers cannot afford to pay the loan back and extend it to the next payday. This is when the debt cycle starts.
In order for a borrower to avoid default, a $60 fee is paid to keep the same loan outstanding if the entire amount of the loan can not be paid back in full. However, in some instances the borrower immediately takes out another payday installment loan with another $60 fee. In either case, the borrower is paying $60 every two weeks to float an advance, without paying down the original amount of the principal. This is how a borrower gets stacked in a debt cycle where he is paying additional fees every two weeks just to keep an existing loan (or even multiple loans) outstanding.
Why are borrowers unable to pay for a payday installment loan? Because many of them are getting loans to support daily needs, instead of urgent and emergency needs only. Although some of the problem can be blamed on the endless massive advertising by some lenders that debt is a normal and acceptable activity in society, many borrowers hastily sign loan contracts without informed decisions. This is oftentimes the reason why they easily fall into the debt cycle.
Instead of using payday installment loans for urgent needs, some get loans for extravagant vacations or for buying things that are not necessary. It is a fact that payday installment loans are specifically designed to be paid back within two weeks to a month, so spending on non-important things will make it difficult for the borrower to pay the loan on the due date. When borrowers have overspent their loan money and have nothing to repay the loan back with, then falling into a debt cycle is a probable result.
Good thing debt consolidation loans provide a viable option for reducing the fees incurred by defaults on payday installment loans. But most borrowers who choose this option are just getting into deeper debt. As a result, they exhaust the cash they have and resort to getting loans again, thus falling into the debt cycle.
What should be done to get away from the debt cycle? The key is discipline to differentiate a want from a need.