Payday loans are a widely used financial instrument. Some consider payday loans as a very useful product. In contrast, others are advising you to stay away from this type of loan. Whether you will find them useful or not depends entirely on the experience, you will have with payday loans. Although they are a rather expensive form of loan, it does offer some benefits.
On the other hand, if a payday loan turns out to be inadequate for your financial problem, you risk increasing your debt level even more. Therefore, before running to apply for a payday loan, make sure that you understand how payday loans work. In addition, it is of crucial importance that you are familiar with the advantages and disadvantages of payday loans. Never make any loan-related decision without having information about the benefits and risks associated with the loan.
Payday loans defined
A payday loan is a form of short-term debt, where the borrower applies for a smaller amount, and he/she is charged a high interest rate. The payday loan is approved based on state-issued ID, proof of stable income, and a post-dated personal check. The post-dated check is written for the amount borrowed plus a fee. The lender will cash the check on the agreed date, which is usually the borrower’s next paycheck. The most common repayment period of payday loans is around two weeks, with an annual interest rate of around 200%. Payday loans are also known as cash advance loans or check advance loans.
Advantages of payday loans
Convenience – because of the characteristics of payday loans applying for one could be hassle-free. In most cases, all you need to apply for a payday loan is proof of steady income, a valid document (state-issued ID), and a checking account, which means that all you need is a bank statement, paycheck stub, and post-date a check. Thus, it is convenient since there is no need to run back and forth to apply for the loan. Payday loans require far less documentation compared to other loans available.
No credit check performed – unlike with the other types of loans, no credit checks are performed when applying for a payday loan. You can qualify for this type of loan, regardless of your credit performance in the past.
You can apply for a payday loan with bad credit – since no credit checks are performed when applying for payday loans. In most cases, users of payday loans are borrowers with bad credit. Because of their limited access to conventional loans, they are turning to funds from payday loans.
No need for collateral – as it is the case with conventional loans. When applying for a traditional loan, you might be required to back the loan with some type of collateral. This collateral will ensure the lender that the loan will be paid back. With payday loans, there is no such a requirement. The lender will not ask for collateral to approve the loan, except for a post-dated check.
A faster and simple approval process – is another benefit of payday loans compared to conventional loans. There are numerous requirements if you want to qualify for conventional loans. Such as credit checks, collateral assessment, calculations of different ratios (for example – debt to income ratio). All these requirements can take some time to be finished. Thus, the approval process can last for a couple of days. Because these requirements are non-existing with payday loans, the application and approval process is relatively fast. Assuming you have the required documents, the time it takes to fulfill the entire process can be less than an hour. That is correct, the process, including – application, approval, and receipt of funds, can be finished in less than an hour. So, if you have decided to take a payday loan, just go to the lender with the documents and state the amount you need.
Immediate availability of funds – is yet another benefit of payday loans. You can enjoy this benefit under the assumption that you have the needed documents. With other types of loans, you might wait for days before you receive the cash, this is not the case with payday loans. This is so because payday loans have a rather simple application procedure, unlike traditional loans.
Possibility for a grace period – you can be approved for a grace period for your payday loan. This grace period might give you the time needed to get back on track with your finances. This is especially beneficial if you are faced with short-term financial distress.
Guaranteed privacy – is also another advantage of payday loans. Namely, you will not be obliged to answer tons of questions. The payday lender is almost always interested only in your employment status and income stability. This makes the process rather discreet for you. You will avoid the need to answer questions such as: Why do you need the loan for? How do you manage your finances? Do you have other loans? What is the level of your debt? The payday lenders don’t care about the reason you are taking a loan.
Disadvantages of payday loans
Expensive form of debt – payday loans are considered to be one of the most expensive forms of debt. Although they come with many advantages, the price you pay for a payday loan is a huge disadvantage. The cost you pay to a payday lender is much higher than the cost you will pay for a traditional loan. Do not get confused about the size of the fee or interest rate. It might seem below, but keep in mind that payday loans are short-term loans, and the interest rate or a fee is not for a full year. The APR on a payday loan can be from around 200% up to 1000% depending on the state regulation. The confusing part is exactly in the term of payday loans. Namely, the repayment period of payday loans is on average two weeks. You will pay about $10 to $30 charge on every $100 you borrow, which doesn’t look so high for this period. But on a yearly level, these charges turn out to be much higher than the interest rate you would pay on another type of traditional loan.
Only short–term solutions – payday loans are a viable solution for short-term financial problems. Namely, if you are faced with insufficient funds for a few weeks or a couple of months, payday loans can help you. But if you need a financial solution for a longer period, then it may be wise to look for other types of loans. With payday loans, you can inject cash into your budget but for a short period. Keep in mind that you are borrowing money against your future income. Combined with the high cost of payday loans, failure to repay this type of loan can increase debt levels.
Questionable contracts – because of the opinion that you are in desperate need of cash. Most often, when going to a payday lender, it might signal that you need the funds. This can make you vulnerable because you will sign every agreement given to you by the lender. Some lenders might abuse the desperation and give a questionable contract. These questionable contracts have terms that mostly benefit the lenders and provide very little protection to the borrower.
Although payday loans offer many benefits for the borrower, they remain one of the most expensive (if not the most expensive) loan forms. Payday loans can be a useful product to overcome a period of financial distress. Payday loans are useful if the financial distress lasts for a couple of weeks. If you are aware that you will have financial difficulties for a longer period, it might be better to consider some other type of loan. Always ensure that you have gathered the relevant information before making any financial decision. Different products have different benefits and risks, thus you should be aware of all of them.