How Payday Loans Can Trap You In A Debt Cycle

Imagine you take out a payday loan of $500 to cover an unexpected car repair. The payday loan comes with an annual percentage rate (APR) of 391% (a typical rate for payday loans). The loan term is 14 days, and you are expected to repay the full amount, including interest and fees, by your next payday.

Initial Loan Details:

• Loan Amount: $500
• Loan Term: 14 days
• Interest Rate (APR): 391%
• Fees/Interest for 14 days: $75 (This is calculated based on the typical fee structure of payday loans, where you may be charged $15 for every $100 borrowed.)

So, you’re expected to repay $575 at the end of the 14-day period. Now let’s see how this loan can easily trap you in a debt cycle.

How you get in a Debt Cycle from Payday Loans

You’re unable to repay in full

Unfortunately, when the loan is due, you’re unable to repay the full $575 because your paycheck was smaller than expected or you had another financial commitment that you couldn’t ignore. You decide to roll over the loan (i.e., renew or extend it), which many payday lenders allow for an additional fee.

Rolling Over the Loan

• New Loan Amount: $575 (includes the original loan amount plus interest)
• Interest for the Next 14 Days: $86.25 (based on the new balance of $575, calculated similarly to the initial fee structure)

After the rollover, you now owe $661.25 at the end of the next 14-day period.

Repeat Rollovers Lead to Debt Cycle

For some reason, you’re unable to pay off the loan again at the end of the next 14 days, so you roll it over once more. Here’s how your debt grows over time:

1. Loan Balance After 14 Days (1st Rollover): $661.25
2. Interest/Fees for Next 14 Days: $99.19
3. Total Owed After 28 Days: $760.44

You continue to struggle to pay off the growing debt and roll over the loan for a third time:

1. Loan Balance After 28 Days (2nd Rollover): $760.44
2. Interest/Fees for Next 14 Days: $114.06
3. Total Owed After 42 Days: $874.50

Breakdown of Debt Over 42 Days

• Original Loan: $500
• Interest/Fees Paid Over 42 Days: $374.50
• Total Debt After 42 Days: $874.50

Explanation of the Debt Cycle

At this point, your debt has nearly doubled in just six weeks. Despite only borrowing $500, you now owe almost $875 due to the constant accumulation of fees and interest. This is a classic example of how payday loans can trap borrowers in a debt cycle.

Once you keep rolling over the loan because you can’t afford the full repayment, your debt will have a snowball effect.

Bottom Line

Payday loans are designed for short-term borrowing, but when you cannot repay the loan in full by the due date, you often end up in a cycle of rollovers. Each rollover adds more fees and interest, making it increasingly difficult to get out of debt.

In your example scenario, you now owe more than you originally borrowed. If this cycle continues, you could face even more financial hardship.

If you are really in need of money and have bad credit, you should consider payday loan alternatives. These services or banks usually offer quick loans of up to $500 with little to no interest on the loan.