Debt Treadmill

Posted by on Jun 16, 2006 in Pitfalls

Debt Treadmill

The most dangerous pitfall of payday loans is the Debt Treadmill.

The debt treadmill is when you have only enough income to pay off the interest on your loan but not the principle.

How does one get on the debt treadmill? Let’s do the math…

Lets assume:

  • your take home pay is $1200 per month
  • you take out a $400 payday loan (to cover an emergency)
  • the payday lender’s fee is $30 per $100 every 14 days
  • total interest is $120 (4 x $30) every 14 days
  • the lender will deduct $520 from your next paycheck ($400 principle + $120 interest)

On your next paycheck, you extend the loan by paying just the interest. This is called ‘rolling over’ the loan. This is the worst thing you can do with a cash advance loan. If you do this, you will be sorry…

…but you will not be alone. Data suggest that eighty percent of payday loan borrowers will extend their loan.

Every time you extend the loan by paying only the interest, you will be charged $120. That’s $120 every 14 days or $240 per month. In other words, your monthly take home pay will be lowered:

$1200 (your old take home pay) – $240 (monthly interest on $400 loan) = $960 (your new take home pay)

Congratulations! You’ve just been demoted!

Your take home pay is now $960 until you pay off the principle of the loan (which, by the way, never changes).

If you had trouble paying off the principle when your were making $1200, how will you pay it off now that your take home pay is only $960? Chances are, you won’t be able to.

So, if you work eight hours a day, your first hour and a half of work, each day, will go to the payday lender.

Say ‘Hi!’ to your new boss. Not only have you been demoted to $960 per month, you now work for two people.

Like a mouse on a treadmill, you will work and work but never get closer to paying off the principle on the loan.

That is called the debt treadmill and it is the last place you want to be. Once there, you will likely stay there until the next emergency either ‘demotes’ you further, adds more ‘bosses’ or wipes you out completely.

Before applying for a payday loan, be sure to:

Recent Posts:

Random Posts:

GD Star Rating
a WordPress rating system