Payday Loans: Pros and Cons
Over the last 20 years, the use of payday loans has grown exponentially throughout the world. As individuals continue to struggle through difficult economic times as a result of the worldwide recession, paydays loans have almost become a necessary evil for many individuals. That is not to say that payday loans don’t serve a useful purpose in some situations. It is up to the prospective borrower to thoroughly understand their situation and the risks involved with using payday loans. Here is a list of pros and cons related to payday loans that require all due consideration.
- No Collateral Required – As the name “payday loans” implies, these loans are short term in nature and are required to be repaid on the borrower’s next payday. The existence of that future paycheck serves as a form of leverage.
- No Credit Check – Most payday loans are made without a credit check. Individuals with bad credit are welcome as long as they are employed.
- No Hassle – Traditional lenders require reams of documentation and paperwork. Payday loan companies only require an easy to complete, two page loan application. If the loan is being processed online, they usually don’t require any additional documents to be faxed or emailed.
- Immediate Decision and Funding – In most cases, applications for payday loans are approved or declined within minutes. If approved, the cash is available immediately from brick and mortar stores, or the following day if the loan was processed online.
- Easy to Repay – For payday loans processed online, the payday loan company will use the borrower’s banking information to setup a reverse ACH transaction in order to automatically collect the loan payment from the borrower’s account on the predetermined pay date. If the loan is processed in a store, the loan company will request a post dated check for the full amount. The check will be deposited on the next payday.
- Easy Rollovers – If the borrower wishes to extend the loan, all they usually have to do is repay the interest and sign a new loan agreement. For online payday loans, the borrower might need to submit an abbreviated loan app. The current loan payment will still be extracted from the bank account, but the new loan amount will be immediately deposited.
- Interest Rate – In most states, payday loan companies can charge an interest rate equivalent of up to 500% on an annualized basis. In some cases, that rate is applicable as well as a small loan fee. This kind of debt servicing can become extremely burdensome to borrowers who are already having financial problems.
- Unfair or Illegal Collection Procedures – While companies that issue payday loans are very pleasant to deal with when asking for money, some of them can become problematic if there are collection issues. Most states have strict guidelines regarding collection procedures that are directed towards lenders in an effort to protect borrowers. Some payday loan companies, especially those that deal exclusively online, can become overly aggressive during the collection process.
- Fine Print – The fine print on loan agreements for payday loans are cumbersome and literally “fine” printed. While it may be a burden, borrowers should take the time to read the agreement at least once. All of the issues discussed are worded for the benefit of the lender to the detriment of the borrower.
Payday loans are very useful in emergency situations. However, they should never be considered a long term solution to cash flow problems. As with any other loans, payment issues and the overuse of payday loans can have an adverse effect on a person’s credit standing. Payday loans should only be considered with the up-most discretion.