What is a major risk associated with payday loans?

The major risk associated with payday loans stems from their high interest rates, which can lead to a cycle of debt for borrowers. Payday loans often charge exorbitant interest rates that can exceed 400% APR in some cases. Because these loans typically have short repayment periods, borrowers may struggle to repay the principal and the high interest in time, leading them to take out additional loans to cover the previous ones. This cycle can quickly accumulate, making it difficult for individuals to escape the debt trap, resulting in significant financial stress and hardships.

Other options may not accurately reflect the major risk involved. Low interest rates are not characteristic of payday loans, as their appeal often lies in the rapid access to cash despite the cost. A lack of a repayment period is also misaligned with the structure of payday loans, which usually require repayment in a short timeframe, often by the next payday. Lastly, while guaranteed approval may seem attractive, it does not address the pressing concern of the terms of the loan and the financial consequences of high borrowing costs.