What are the major risks associated with payday loans?

Payday loans are associated with several significant risks, one of the most prominent being the potential to create a cycle of debt for borrowers. This occurs because payday loans typically have very high interest rates and short repayment terms, which can make it challenging for borrowers to pay off the loan in full by the due date. When borrowers are unable to repay their payday loan on time, they may be tempted to take out additional payday loans to cover the existing debt, leading to a spiral of borrowing that can be very difficult to escape.

Moreover, defaulting on payday loans can adversely affect a borrower's credit report. While payday loans themselves may not always be reported to credit bureaus, if a borrower defaults and the loan is sent to collections, that negative mark can greatly impact their credit standing. This can hinder their ability to secure future credit, such as mortgages or auto loans.

In contrast, options that suggest payday loans come with low fees and interest rates or that they automatically improve credit scores are misleading. The reality is that payday loans are known for their high fees and interest rates, which contribute to the financial strain on borrowers. Additionally, rather than improving credit scores, the misuse of payday loans can lead to a negative impact on a renter's credit history.