Pros and cons of payday loans
The most important thing that you need to know about payday loans is that they are only intended for short-term borrowing. Payday loan providers claim that payday loans are only supposed to be used for occasional emergencies. However, data that has been collected about payday loans shows that the average payday loan customer uses a payday loan at least 11 times per year. What this means is that even though these loan providers are available for people who are facing a financial emergency these loans can end up becoming similar to an addiction because you have to keep borrowing money just to survive.
Like all forms of credit, payday loans have their pros and cons. Before you make the decision of using a payday loan, you should learn about the pros and cons so you can make the best choice possible regarding your situation.
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Here is a look at some of the pros of payday loans.
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Short-term credit facilities:
When we face a financial crisis one thing that many of us do is put the unexpected expenses on a credit card. However, some of us do have credit cards for our own reasons, so what they do instead is seek a short-term credit facility to help them with the unexpected expenses. In an answer to the growing credit card problem in the United States short-term credit facilities have begun opening up. These short-term credit facilities offer people the chance to obtain short-term loans, usually called payday loans. However, you want to keep in mind that short-term credit facilities might not be the right thing for you, no matter how good the opportunity sounds. One thing that you need to know about short-term credit agencies is that they are not regulated the same way that banks and other financial lending institutions are. Banks and other institutions have stricter guidelines and regulations that they must follow when it comes to lending money, which is why they do credit checks on their customers. Short-term lending facilities are also regulated by federal and state laws, but the guidelines and regulations that they have to follow are different, which is why they do not need to perform credit checks when lending money. In fact, some states have even passed laws that forbid short-term lending facilities from doing business in their state. Before deciding on a short-term credit facility makes sure that, you do some basic research on the company. When investigating the company you are going to want to find out what they allow what kind of things they require from you to get the loan and any other terms or conditions that they might have. The best way to get this information is to ask the payday loan provider for a copy of their terms and conditions and their privacy policy. This will allow you to discover everything, including hidden fees or charges, from the short-term credit facility. Also, look into the payments that you will be making with the short-term credit facility. Before you borrow any money from them, you want to make sure that you can afford to pay it back when the loan comes due. |
Number one: No credit check
One problem that some people face when they need to borrow money is going through a credit check. Some people have either bad credit or not enough credit to qualify for a normal loan through a bank, while other people simply have too much debt to pass a credit check. This is where payday loans come in handy. With a payday loan, you will not need to go through a credit check. Although there is no credit check, you will still have to show proof of steady employment and have a bank account that is in good standing. Payday loan providers will run your name through a system like TeleCheck to see if you have any bounced checks or even any payday loans that you have defaulted on.
Number two: Speed
You can get approval on a payday loan is as little as 30 minutes, depending on where you go. If you go to a physical store as long as you have the required proof that they need you can get your approval on the spot. With online lenders, it will only take you a few minutes to fill out the paperwork, as long as you choose the no fax option. If you choose the fax option, you can submit your application as soon as you are done filling it out, but it will take you a little bit longer to get a reply. In addition to having a fast approval speed you can also get your cash quickly too. If you apply in person, you can usually get your cash the same day that you are approved, unless you choose to have it direct deposited into your account. If you choose to have, the money sent straight to your checking account, which is the main option you have when applying online, you will have to wait until the next business day to receive your funds.
Number three: Avoiding fees
Obtaining a payday loan is a great way to help you avoid late fess that can collect when your bills are left unpaid. Even better than avoiding late fees payday loans can help you avoid those costly bank fees that can incur, such as NSF fees, which you get charged each time you try to write a check to cover an amount that is more than what you have in your checking account. NSF fees can also be referred to as bounced check fees. In addition to those fees, if you bounce a check you have fees from the lender for the returned check. Before you know it these fees can cost you over $100 plus the original amount that you owed. If you take out a payday loan, you are typically going to pay about $15 for every $100 that you borrow, which is cheaper than having to pay all of those extra fees.
Number five: Credit
Payday loans can also help to improve your credit score, which is if you apply for a payday loan that reports your timely payments to the credit bureaus. Most payday loan providers do not report your timely payments to the credit bureaus because of how short the lending period is, but if you do, default on your payday loan that will be reported to the credit bureaus and other payday lenders. However, payday loans can also help prevent late payments from being reported to the credit bureaus because you can borrow the money you need to avoid having any late payments. The same thing holds true for missed payments, if you borrow money to make your payment it will not be reported as a missed payment on your credit report. This can be a lifesaver for you because late payments and missed payments stay on your credit report for seven years, which will affect the interest rates that you qualify for during that time.
Here is a look at the cons of payday loans.
Number one: Interest rate
With payday loans, you are usually paying an extremely high interest rate for borrowing a small amount of money. Payday lenders have to express their interest rate in terms of Apr so that they can comply with federal laws, but that still doesn't change the fact that you pay a higher interest rate for these types of loans. One thing that is interesting to note that the shorter the loan terms are the higher the interest rate. For example, a one-week loan can charge 911%, a two-week loan can charge 456%, and a one-month loan can charge 212% in interest for the same amount of money. The payday loan industry claims that these high interest rates are needed because of the risk that is being taken in lending the money, but also because of how many payday loans are defaulted on. However, from data that has been collected from the payday industry in Colorado they only write off about 35 of their loans as a bad debt.
Number two: Not for long term
Payday loans are meant to be a solution for short-term money problems. This is why they are usually due in full on your next payday. Some payday loan companies will allow you to pay off the loan over several weeks or even a few months. This is something that should be avoided because of the interest rate of the payday loan. Other financial options are available that have lower interest rates for long-term borrowing. If you use a payday loan for a long-term solution, you will end up spending a lot of money in interest, which this can be saved by using a better option.
Number three: Loan caps
Payday loans are limited to how much money can be loaned to a person during a single transaction. The loan caps are determined by the state that you live in. For the most part payday loans are capped at $1,000, but a few states will allow lenders to loan up to $1,500, but three states allow less than $1,000. Illinois only allows you to borrow up to $400, California, and Hawaii cap payday loans at $300. The other factor that goes into determining how much money you can borrow is your income. Payday lenders will look at your income to decide the final amount that you can borrow so they can be sure that you can afford to pay it back. Keep in mind that they do not consider your other expenses when determining how much you can afford to pay back.
Number four: Traps
If you are not careful when taking out a payday loan, you can be stuck in a cycle. How this usually happens is that people borrow the maximum amount that they are approved for rather than just borrowing the small amount that they need to take to get through the emergency. Not to mention that the high interest rates make it hard to pay back the loan when it is due, so most people find themselves paying off the loan with their paycheck only to borrow more money to survive until the next payday. Alternatively, what other people will do is have the loan extended by paying the finance charge again, so what happens is these people get trapped in paying finance fees and usually end up paying more in fees than what they borrowed in the first place.
Number five Contracts
With a payday loans as a borrower you are going to need to sign a contract stating that you agree to all of the terms and conditions that the payday loan provider has. The problem is that with some of the contracts you are going to be agreeing to terms that are highly favorable to the lender than to you.
Just remember that if you are not responsible with a payday loan this can only cause your debt problems to get worse because of soaring fees and unpaid bills. These loans are not intended to help you solve long-term budgeting problems; they are only intended to help you out in the short-term.
