The U.S. has a notorious culture of debt where most people would take out loans and buy things on credit, despite not having the financial ability to pay for these things in a timely manner. When borrowers are unable to make repayments, they sometimes depend upon another creditor which will absorb their existing debt and incur interest on top of their existing balance. When they cannot make the repayments on this second creditor, they will turn to the next… and so on.
Rolling Over of Credit and Debt
Then there is “rolling over” credit, or borrowing money against future income, which may or may not be steady. For instance, in case the borrower needs immediate cash, she or he would then go to a creditor that offers payday loans. With minimal requirements such as proof of employment and compensation and a check for the borrowed amount, he can then walk away with his next payday’s income minus the interest rate levied by the creditor. When the check comes into maturity, the borrower is expected to return to the creditor and pay the owed amount in full; failing to do that, the creditor can then cash in the check. In case there are insufficient funds in the borrower’s account, then he will be charged with the fee for a bounced check as well as additional interest from the creditor.
Now, since payday loans are short-term loans, the interest rates are normally astronomical, ranging from 300 to 1000 percent annually, according to a 2003 Federal Deposit Insurance Corporation (FDIC) research on payday lending. Aside from the high interest rates, there is also the risk that the borrower will not receive the amount he is expecting in his next paycheck. This is a high probability, considering that some workers are paid by the number of hours they reported for work – for instance, what happens if the borrower was unable to work for a number of hours because of a family emergency or because he got sick? The amount he would be given for that pay period would be significantly lesser than what he expected, which can spell trouble if he already borrowed against his next payday check. As a result, he could be enticed to borrow against his future paycheck again, adding into the interest rates he has to pay as well as for the deductions he has to shoulder.
When this happens, the borrower is locked in a never ending cycle wherein his debts are more than the amount he is bringing home. By continuing to borrow against future income, he can be putting himself into more and more debt, as he is unable to get the breather he needs to earn more than what he owes. Unless a significant raise or bonus is given to him in the near future, he would be imprisoned by the cycle for a long, long time, as he struggles to balance what he could be earning against what he has to pay.
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