There is a substantial number of people in the country that take out payday loans and are not able to repay them. These loans are marketed to consumers who are not able to procure credit through conventional channels so they are forced to go to these predatory lenders.
How Payday Loans Work
The payday loan provider will lend you a predetermined amount of money until your next payday. What the lender will do is look at what your average take home pay is after deductions and usually lend up to 50% of that amount. Since the payday loan borrower has no other lender they can go to and are desperate they will agree to any terms the lender offers. These payday loan providers say their loans are inexpensive but if you calculated the interest over the span of one year instead of a few days you would realize the effective interest rate is in the 1,000%+ range. That is not a typo! There are people paying over one-thousand percent interest on loans they cannot afford to take.
When payday comes around the borrower will need to repay the loan but they are back in the same predicament where they don’t have enough money to survive so they have to take out another payday loan. This cycle continues until eventually the borrower cannot repay the loan and has their paycheck garnished by the lender. These borrowers end up falling on hard times and in certain situations they lose ownership of their property. The government is working on limiting the way these payday loan providers do business but in the interim it would be wise to simply avoid them if at all possible. You will never be able to break free from these loans so avoid them like the plague.