Payday Loans Can Turn Holiday Spending into a Debt Trap

Consumers Should Avoid Loan Shark Lenders

Consumer advocates over at DebtHammer are warning that excessive borrowing to finance this year’s Holiday spending could lead to a debt trap that results in a lump of coal that lingers long after the stockings are put back in storage.

According to a recent survey conducted by DebtHammer, a majority of Americans plan to go into debt to finance Holiday shopping and gift giving. Specifically:

Though more than 78% say they have some savings set aside for holiday spending, 58% said they expect to take out a payday loan or other short-term loan to pay for their holiday celebrations, and 66% expect to use a “buy now, pay later” plan like Afterpay, Klarna or Affirm to help spread out their expenses.

While typical payday lenders can carry excessive interest rates — sometimes 400% or more — buy now, pay later services can also be highly problematic.

Lauren Saunders of the National Consumer Law Center (NCLC) warns that some BNPL products focus on consumers who are not likely to be able to repay the debts on time. These consumers then incur significant late fees that boost the revenue earned by the service provider.

BNPL providers do not directly consider the consumer’s ability to repay. Even if they check do a soft check of credit reports, those reports may not reveal BNPL debt. Industry analysts have warned that BNPL providers may…