The Truth about Payday Loans: A Balanced View
Payday loans have a very bad reputation. Even so, they do meet a need. They provide short term finance for people who may be unable to get loans from banks. People with a bad credit rating or a low income can find it difficult to borrow money. Yet, there are times when they need to finance a shortfall. Are payday loans as bad as people say? Or, are these short-term loans a much-needed safety net for the less well-off? Here’s the truth about payday loans.
What Are Payday Loans?
Payday loans are short term loans. They are available from loan stores and online. Payday loans are also sometimes known as cash advances, check loans, or cash advance loans. Payday loans are usually repayable in full the next payday. Hence the name. They often involve giving a post-dated check to the lender to cover the repayment.
How Expensive Are Payday Loans?
Payday loans can be very expensive. Especially compared to conventional bank loans. Annual percentage interest rates (APR) can be as high as 1,000% APR. There are also usually high charges if the borrower defaults on the repayment or rolls over the loan as well.
Why Are Payday Loans So Expensive?
Payday loans are often marketed to people on low incomes. They are often granted without any credit checks. The payday industry argues that the high risk of making payday loans justifies the high cost. Others might argue that payday loans are preying on the needy. If you can’t afford your medical treatment, for example, you might be willing to pay any price to get a loan.
Why Do Payday Loans Have Such a Bad Reputation?
The main reason that payday loans have a bad reputation is that they can cause a spiral of debt. A person who can’t afford to meet a one-hundred-dollar expense this month is unlikely to be able to afford $100 the next month as well.
When that happens, people rollover payday loans. Usually for a fee and an increase in the interest rate. Sometimes, people will borrow from one payday lender to pay back another. They never clear the debt, and the loans are very expensive to maintain in the long-term. Payday lenders also have a reputation for using aggressive collection methods.
Why Do People Use Payday Loans?
It is difficult for some people to understand how there can be any benefits of payday loans. Why would you borrow $500 at high-interest rates when you could buy what you need with a credit card? The truth is that some people don’t have access to credit cards.
For some people, a payday loan is the only option. People use payday loans in emergencies. When they need cash to repair their car, or fix their heating, for example. The problems arise when people use payday loans to live on, or they don’t pay back the loans on time.
What Are the Benefits of Payday Loans?
Payday loans are easy to apply, and the cash will often be available in your bank account the next day. If you have an urgent expense to pay, a payday loan can provide the short-term finance that you need. These types of loans are often available with no credit check. That makes them attractive to people who have not built up a strong credit rating.
What are the Drawbacks of Payday Loans?
Payday loans are an expensive way to borrow money. It is important that you repay a payday loan on the due date, or the costs will mount up. If you can, borrowing the cash from another source would be preferable. A friend, a member of the family, or a credit union, for example.
You can also often negotiate payment terms with suppliers and utility providers. If none of these things is an option, a payday lender could be your last resort. So long as you are sure that you repay the loan on time. If you do need to resort to borrowing from a payday lender, don’t jump at the first one you find. Shop around and compare interest rates and charges before you agree to a loan.
Conclusion
Payday loans are not an ideal way to borrow money. They can, though, be the last resort for a lot of people. Payday loans provide a means of obtaining emergency cash to pay urgent bills. If used only for short-term, emergency finance, payday loans meet a need. But they do so at a very high cost.