In a nutshell, payday loans are cash advances that are made against your next paycheck. This is a common loan program used for emergency expenses and which quite frankly, borrowers are advised to stay away from. Why is this the case when payday loans are usually the most helpful way out of many tight financial situations?
This article discusses the pros and cons of a payday loan to help you put things in perspective the next time you decide to take out a payday loan.
The Advantages of Payday Loans
Easy. Provide all the necessary information in the application and submit. The process is not strict and does not ask for requirements that you can’t provide right out. The most common requirements for a payday loan include:
- a minimum age requirement
- proof of income (pay stubs)
- phone number or contact information
- bank account information
Fast. If you apply with your local payday lender, the process takes about 30 minutes or less. If you are applying online, the process barely takes 5 minutes.
Compared to traditional personal loan lenders that might take up days or weeks to approve your application, a payday loan can be approved in a day, even hours. Some lenders can even hand you the money in as fast as an hour.
The Disadvantages of Payday Loans
While the pros of these loans are effective lures to borrowers, there are also many reasons why experts advise you to not get involved with these transactions. Let’s take a closer look at these reasons.
High interest rate. All that fast-processing with little to no credit evaluation is compensated by payday lenders through high Annual Percentage Rates (APRs). Typically, they range from 400 percent to 500 percent interest. If you are confident that your financial distress will be temporary and have a way of paying the loan back, a payday loan could be a viable option.
Fees. If you fail to pay your loan by the time they are due, your payday lenders could put a fee as penalty charges. If you continue to fail to make your payments, you can end up owing your lenders hundreds – even thousands – of money.
Collection Practices. Some payday lenders may resort to aggressive tactics to get their money back. Things like calls and threats to your family members are the most common. If you encounter these, report to the authorities or consult with your attorney. Be sure to get legal protection.
Contract Issues. You’re already taking a risky loan, don’t make it worse by not reading the fine print of the loan document. These loans are notorious for being favorable to the lenders and can cause you serious trouble when something goes wrong. Know what you are up against and be sure to walk away when things are too tight.
Payday loans are fast patches, but certainly not long term medicine for your financial pains. Temporary needs can be mended by temporary fixes, but be sure you understand the risks you are taking before you sign that application.