The Pros And Cons Of Payday Loans
Quick, easy and almost always approved, what could be the downside of a payday loan?
Plenty, according to personal finance experts, especially if the borrower isn't acting from a position of financial security and making a responsible choice when it comes to paying back the principal.
What's a payday loan?
Essentially, it's a cash advance taken against your next paycheck provided to you by a third-party lender and that is not your bank. Some take out a payday loan from a brick-and-mortar business in their city or town. Others opt to borrow from online lenders. Typically, payday loans are taken to cover emergency expenses until the next payday arrives.
Payday loans are notinherently bad. Used with care, they can be an effective way to get through a short-term financial tight spot. But they can be pricey, via fees and high interest rates, and borrower mistakes tend to add up.
Before you sign up for a cash advance against your next payroll disbursement, have a look below at the pros and cons of taking out payday loans.
The Pros Of Payday Loans
- Ease Of Application: Few spend more than 30 minutes filling out a payday loan application. Most, especially online borrowers spend about five minutes. There's seldom a time consuming credit check. The paperwork is often light.
- Ready Approval: Usually, no credit check and no collateral are needed to secure the loan. Poor credit scores are not typically a hindrance.
- Quick Cash: Most borrowers will have their money in hand within 24-hours. Some borrowers, however, once approved, can get their money within an hour.
All of this adds up to a sense that payday loans can help you to get a bad financial situation under control quickly and easily. And that may be true. Payday loans serve a function: cash in a hurry. If your car breaks down or the hot water tank bursts, it might be a way to bring a bad situation back under control.
The Cons Of Payday Loans
- High Interest-Rates: Do not take out a payday loan unless you've got your method of payback in place. Some payday loan lenders have been known to charge a 500% annual interest rate according to The Credit Courier and other online resources. The average interest rate is about 400%, according to MarketWatch at MSN.com.
- Fees: Failing to pay back the cash advance on time can lead to penalty charges of $15 per $100 -- and sometimes quite a lot more. If you miss your payment on the first try, your loan is often "flipped" or rolled over into a new one, and a new fee is added. Then, new interest is calculated. Start down this path and you'll be into the lender for hundreds of extra dollars in no time.
- Lender-Powerful Contracts: Another detail common to the payday loan scenario: contracts tend to be highly favorable to lenders. Once the lendee's ink is on the page, or the AGREE box is checked online, those who failed to consider the fine print can find themselves in a legally weak position if something goes awry with the loan. The bottom line is, read the contract carefully. If you suspect that your finances might not support a timely payoff of a payday loan, don't add your name to the list of consumers who get burned by a stringently worded agreement.
- Collections Practices: Some payday loans come with collection practices that fall into ethical and legal gray areas: calls to places of employment, calls to family members, threats of arrest -- the gamut of tactics that consumer-protection agencies work to track down and stop. It's not universal to the industry, but it's also not unknown. If you run into trouble with any of these kinds of collection, contact your local attorney general for advice about how to protect yourself from further exposure to frowned-upon practices.
The pros and cons listed above contain all the information you'll need to understand this takeaway: Payday loans can bridge a gap, but they cannot replace a long-term fix to cash flow problems.
For those earning enough to cover that car repair over the space of a couple weeks -- but without the money on-hand the very moment that the axle falls off the auto -- a payday loan might do the trick.If it's that finances are generally in trouble, however, and bills are piling up: payday loans stand to make a bad situation momentarily better, and then a whole lot worse.
In that case, a payday loan is an extension of what might be called magical thinking. And it will cost a lot of money and hardship to learn the lesson it contains.