The Benefits and Risks of Payday Loans
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Sometimes people need instant cash for a few days or even a couple of weeks, until their next paycheck arrives. Scenarios such as these keep arising for those people who live paycheck to paycheck and who have a very tight budget on a weekly or a monthly basis.
Funds for any small or big emergency are usually low or nonexistent. So if they run out of cash and an urgent need arises, like a trip to the doctor, an urgent repair work that needed to be taken care of, or simply an extra spending need on routine purchases can throw the budget off kilter as these expenditures are hardly ever factored in into the spending budget of a family. When such a situation arises what then can the head of the family do? Where can he turn to in order to weather those few days before the next payday comes and he can retain the reins on the budget?
The answer is a payday loan. These loans usually help people in the short term and provide for instant cash that can be returned immediately after one receives a paycheck or according to any agreement that is met before the loan is extended.
What exactly is a Payday Loan?
As the name suggests, it is a loan extended to working people who need help with their cash flows in the short term for some urgent need. The duration is usually for 2 weeks, or any other time period that is predefined. The borrowers can repay the loan in small installments which consists of the loan amount and a fee on that loan amount. Or they can repay the whole amount with the fee lump sum on the decided date. The loan amount and repayment plan is determined by the financial situation of the borrower which is easier to obtain than a traditional bank loan that has more stipulations than these loans.
Like any other loan, payday loans have their own risks and benefits of acquiring them; and one needs to be knowledgeable about them in order to make an informed decision.
Although these loans can be easily obtained, there are quite a few risks that are attached to them.
- Payday loans cannot be constituted as something to cover your long term financial issues. It is predominantly for working people who have an urgent shortfall in their funds so that they can cover for the few days until their next paycheck. Relying on these funds on a continuous basis can prove to be very damaging to a person’s overall financial health.
- As these are unsecured loans – that is they do not need collateral for a loan to be extended – they have a high rate of interest compared to other loans, which may be difficult to repay.
- Although the installments are not too high to repay can still be a problem for those who are already tight on funds. If there is a missed or late payment, then apart from the penalties that are added on the loan amount, there is a negative impact on the credit score of the borrower as well.
The benefits can be enjoyed, by keeping the risks to a minimum, if the loan repayment is done in a timely fashion. If the borrowers stay on top of their payments, then the payday loan is in fact something that helps them in their most time of need.
- Whether in a lump sum form or in installments, returning a payday loan can be easy, if one budgets this expenditure into their spending. It is usually low as the loan amount usually ranges from $100 to $500 and the fee rounds up to about $10 to $50 or a 10% fee charge.
- As already stated these loans do not need collateral so your house, car and other valuables need not be pledged in order to obtain a short term loan. There are online lenders who provide the convenient way to receive the money by asking the borrowers to fill out a simple online loan application. Hence, the whole process is quick and easy, with little time and effort spent. It is even more convenient, as the borrowers may need this money urgently and with little delay, obtaining funds can be extremely rewarding.
- No upfront fees attached to gaining access to it, makes it an easy and affordable choice when the need arises.
Critics of payday lending state that the rate of interest on these loans is too high. A $15 fee on a $100 advance for two weeks amounts to a 391% annual percentage rate which is much higher compared to any other conventional loan. However, the standard term of these loans is only a couple of weeks and not more. It should also be noted that the annualized interest rate on the average payday loans is much lower than it would be for the fee on a bounced check or a late mortgage or credit card payment. This could be the saving grace that you may need when installments for a mortgage or car loan are up and you are unable to pay for them. Instead of losing your house and/or car you can simply go for a payday loan and give yourself the grace period you need for those few days, until your next salary arrives.Another benefit is that the government regulates the lenders and borrowers, so as to streamline the whole process and prevent any fraudulent activities from happening. Such loans can easily be the target of money launderers who would want to avoid the government’s eye. However, several states have taken measures to reduce the risk of both lenders as well as borrowers from taking undue advantage of these loans.
A borrower needs to keep in mind all these risks and compare them to the benefits to finally decide to go for a payday loan. It is an easy method to gain a breather for the few days a person is tight and eases the tension of a cash flow crunch.
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