Payday loans are small, short-term loans. They are also sometimes known as a “payday advance” or a “cash advance.” They are usually for amounts of a few hundred dollars and must be paid back within a week or two. Payday loans, as their name implies, are designed as a way for working people to quickly get cash to cover necessary expenses until payday.
Payday loans are offered through dedicated retail locations or, in some cases, through another business like a grocery or convenience store. Recently, some providers have also begun offering payday loans online. Banks are usually not involved.
These loans tend to be relatively high-interest but neither collateral nor a credit check is required. They are an increasingly popular option for people facing immediate and unexpected financial hardships.
Understanding the Pros and Cons of Payday Loans
Some people and organizations are critical of payday loans and their lenders, often claiming that they take advantage of the poor and ill-informed. In actuality, though, payday loans provide an important service. They make borrowing money accessible to people who would not be approved by a bank or other traditional, mainstream lender. When used responsibly, a payday loan can be a smart financial choice.
It is true that payday loans are most popular with lower income people and those going through significant financial hardship. This doesn’t mean that they are inherently exploitative, though. Nearly everyone has experienced money problems at some point in his or her life. Whether it was the loss of a job, a medical emergency, car problems, or one of countless other unexpected difficulties, we have all had times when we just needed a little extra cash to get by.
Particularly in today’s troubled economy, getting a “traditional” loan has become much more difficult, even for those with good credit. For people with little or no credit history, and those who have had credit problems in the past, it may not be a realistic possibility. Credit cards, another popular source of back-up or “emergency” funds, have also become more difficult to get. Payday loans have stepped in as an accessible, affordable source for short-term lending.
Advantages of Payday Loans
One of the main advantages of payday loans is that they are relatively quick and easy to get. Even under the best of circumstances, getting a loan at a bank is a slow process. It typically involves several meetings with loan officers, a detailed background check, and lots of paperwork. Credit cards present much the same situation. If you don’t already have one, the approval process combined with the wait to receive your new card can take weeks. Neither of these options is particularly useful when you need money right away.
Payday loans, on the other hand, are fast, easy, and minimally time-consuming. Payday lenders provide cash on the same day you apply for the loan (often within just a few minutes.) There are no extensive credit or background checks to worry about and no lengthy interviews to sit through. The ability to provide cash quickly to lenders is one important thing that sets payday lenders apart from other financial service providers.
Another important advantage of payday loans is that even people with bad credit or no credit can get them. Payday lenders are comfortable working with individuals who have had financial issues in the past. They know that mainstream banks can be very unforgiving when it comes to credit history problems.
Payday lenders are also aware that providing loans to “high risk” borrowers, as they are called, represents a substantial risk of non-repayment. In fact, the average payday lender experiences a 10 – 20% default rate per year. This is the main reason that interest rates on payday loans are usually a bit higher than on most other types of loans. So, while interest isn’t cheap, a payday loan is still a great option when you need money quickly.
How Can I Get a Payday Loan?
All that’s required is to visit a loan retail location, fill out an application, and provide proof of income, such as a bank statement or recent pay stubs. In some cases, an open checking account is also required.
Once all this has been provided, the lender will make you an offer on a loan. Although the specifics vary be lender, you can usually choose to take out between 100 and 1500 dollars. Your interest rate will depend on the amount taken out, your monthly income, the laws and regulation in your area, and the policies of your individual lender. Around 15 dollars in interest for every 100 dollars borrowed is common.
It is now also possible to apply online for a payday loan. After submitting you application via the lender’s website, your loan is electronically deposited into your checking account, often within one hour. For many people, this makes taking out a loan even easier and more convenient.
Is a Payday Loan the Best Choice for My Situation?
Payday loans are ideal for people who need a small amount of cash (usually a few hundred dollars) to take care of emergency expenses. Situations like being short on the rent or other monthly payments, unplanned car repairs, medical expenses, and overdue phone bills are all potentially good reasons to take out a payday loan. You are totally free to spend the loan any way you’d like, however.
You should probably not get a payday loan if you are currently unemployed, think you will be soon, or if you are not confident that you will be able to pay the loan back in full at the agreed upon date. Payday loans are also not recommended as a source of non-essential “spending money.” While the temptation to use your loan money on new clothes or a night out is understandable, the high interest rates associated with payday loans make this a poor idea for most people. In short, payday loans are great when you really need the money but should probably be avoided when you don’t.
A payday loan can be great way to get out of a tight financial spot. If you end up defaulting on it (not paying it back on time,) though, it can become a major problem. Late fees and penalties really add up. Just remember to be careful and responsible – only use the loan for necessary expenses and be sure to save enough from your next paycheck to pay it back – and you won’t have any issues.