Payday loans are aggressive, short-term forms of credit that require borrowers to repay the entire loan amount plus very high-interest fees on their very next payday.
If a borrower is unable to pay off the entire loan plus applicable fees and interest by their next payday, new finance charges are added to the loan and the principal borrowed amount is rolled over again to the next payday.
As a result, payday loans can become extremely expensive extremely quickly, especially when borrowers are unable to repay them on time, as they continue rolling over from payday to payday, exponentially increasing.
This cycle usually results in substantial finance fees and the borrower falling further into debt.
Even worse, payday loan finance fees can’t be avoided because borrowers do not pay off the principal or borrowed amount until the very end of a loan, which is called a balloon payment. Therefore, payday loan agreements often include a full finance charge in the final balloon payment, without an option of reducing interest by paying off the loan early.