Payday loans have gotten a bad rap, getting demonized as one of the worst things a person can do for their finances. While there are some bad apples out there in the payday loan industry, that doesn’t mean that there is never a good time to take out such a loan.
We’re going to discuss some of the positives and negatives of payday loans in this article, hopefully bringing you to a better understanding of how they work and when they should be used.
Keep an open mind, and suspend judgment on payday loans for a moment, because we think you’ll learn a few new things today.
What are Payday Loans?
Before we start discussing the good and bad of these things, let’s talk about what they really are. Payday loans are a way to borrow money that allows you to get a small amount of cash, typically somewhere between seven hundred to one thousand dollars, before you get paid by your job.
It’s incredibly easy to get one of these loans, and the money is fast. With that said, the fact that you are able to get the money so quickly comes at the cost of relatively high-interest rates. Additionally, you’re required to write out a check in advance for the lender to use as collateral.
The payment is typically due in a short amount of time, and that’s where most of the trouble lies. When you miss a payment, you’re liable to be put through a gauntlet of other fees that only continue to rise.
So, now that we’ve got a decent idea of payday loans, let’s go into some more specifics about their positive and negative qualities.
The Cons of Payday Loans
Payday loans can sort of be likened to a pawn shop. That is, they provide you with the opportunity for fast money, but if you’re not careful, you’ll lose your things or get stung with large fees.
People bring things into a pawnshop, often thinking that they’re going to come in the next day to pick it back up after they get paid. The thing is, when you’re broke and you suddenly come upon a decent amount of money, you’re going to spend some of it.
Maybe it’s within human nature to splurge when you’re finally at ease financially, maybe it’s just a person’s character. In whatever case, payday loans can make a person respond similarly.
It could be the case that you’re in need of a payday loan because you want to furnish your apartment, buy an instrument or computer, or cover the remainder of your rent. You’re only going to take out these loans if you don’t have the extra money on-hand, and that’s fine.
The thing is, you’ll probably have a surplus, spend it, and you might come up short on your paycheck when it’s time to pay the loan back. That’s where the trouble lies.
Extreme Interest Rates
Payday lenders have to make something by performing their service. If they didn’t charge high-interest rates, their short-term loans would make them little to no money.
As a result, the interest rate is high enough to give the lender a little return on their investment for the short period of time you’re supposed to borrow it for. With that said, people don’t pay loans back immediately in many cases, putting them under financially.
Compound interest rates of 300% can quickly rise and reach heights matching those of a student loan payment or more. That is if you don’t get a handle on the costs immediately. This is likely, too, because a person taking out a payday loan probably won’t have a savings or extra cash to offset those costs.
The result is a wake of individuals who have been taken advantage of by payday lenders who were dishonest and predatory. Additionally, some of the individuals may have just failed to understand the concept, the interest, or didn’t think about repayment.
High Acceptance Rates
Another piece of the payday loan’s bad name is that it’s extremely easy to get approved. Interestingly, this is both a pro and a con. We’ll discuss that pro later.
The fact that nearly anyone can get a payday loan is not always a good thing. Lenders discriminate among individuals with different financial backgrounds for a reason.
Sure, a lender could make a whole lot of money by giving a thousand dollars at 1000% interest to someone who shows no sign of being able to pay it back. That would bring the lender a great deal of money and success.
At the same time, it would put the individual under, possibly for their entire life. No functioning market can operate with regulations to prevent lenders from preying on innocent individuals like that.
At the same time, payday loans still attract individuals who understand the deal and continue taking it, even if they can’t pay. This typically leads to an intense debt that rises quickly.
Simply make sure that you have the money to repay your loan when it is due. If you don’t, the slope gets slippery fast.
Potential Cycle of Loans
One loan may lead to another, may lead to another, may lead to another…
When a person is put into a dire financial situation, there’s no telling where he or she might get the money to pay their debts. In most cases, the money comes from another lender of some sort, one who asks high-interest rates and quick repayments.
This is an extremely undesirable cycle and you should do whatever you can to avoid it. We’ll talk a little more about ideas for approaching payday loans in a moment, but let’s move on to some of the pros now.
Pros of Payday Loans
In the face of the scary issues listed above, payday loans do have their place and you don’t have to avoid them at all costs. It’s a valuable thing to have access to money at a moment’s notice, whoever you are.
Emergency Cash
Sometimes you have to have access to an immediate large sum of money. Emergencies come up, people lose their jobs, friends need help, and things just happen. With that in mind, it’s nice to know that you can potentially access money without having to wait too long.
You can even complete most of the process online in some cases. All in all, this is definitely the greatest benefit of payday loans.
High Likelihood of Approval
If you have bad credit or something else preventing you from getting financial help, it can get pretty tough to find assistance when you need it. You can seek out a payday loan with a fairly good chance that you’ll get approved.
With that in mind, you can be confident that payday loans are an option for you, even with poor or bad credit. With that said, you might not get approved for the loan if you have no clear way of paying it back.
This is certainly a positive thing. Although you may need money for whatever reason, the reality of ever-increasing interest and debt is almost certainly worse than not accessing the money.
A rule from the Consumer Financial Protection Bureau ensures that individuals receiving payday loans are screened and assessed for their ability to pay the loan back.
If you think you might need to take out a payday loan at some point but aren’t sure if you’ll be approved, you can contact a local or online lender and find out if they would be willing to approve you for a specific amount. That way, you can be confident when emergencies do arise and you need money.
Dependable Supplement to Income
If, and only if you have the reliable ability to repay your payday loans, you can rely on them as a method of helping you out of jams. Maybe there’s a factor in your life that consistently requires you to come up with cash on a moments notice.
If you’re relatively strapped for cash, you might not have such sums of money available to you all of the time. At the same time, your paycheck is coming and the money will be in your account shortly.
In these situations, you can depend on payday loans to consistently keep you afloat. That’s only if you’re stable financially and don’t ever accrue extra fees.
Adjustable Amounts
One nice thing about payday loans is that you don’t always have to take out the maximum amount. Many lenders will have a variety of loans for you to take, so you don’t have to take out 1,000 dollars when you only need 300.
Additionally, there are some payday loans that can reach up to around 5,000 dollars. Typically, loans of that size will have more stringent approval requirements, so make sure to look into the specifics of your lender if you think you’ll need to go that high.
This can greatly improve your odds of staying in the green on payments and avoiding late fees.
How to Approach Payday Loans
Our suggestion to you as you think about payday loans is to develop a really solid understanding of what to expect.
If you’re thrown into an emergency situation, don’t simply run to the first payday lender, get the money, and suffer the consequences later. If you think that you’ll need to utilize a payday lender at some point in time, research your different options extremely well.
Look into the different rates, repayment periods, and reputations of various lenders. The reputation is possibly the most essential piece of that equation. See if the lender has been known to lie or rip people off.
If you aren’t sure about the quality of the lender, you can make a few inferences. If the lender is going to screen you well and be discriminatory toward poor credit, they are likely a high-quality lender.
Shady lenders will take on any individual, regardless of if they can pay or not. Although there are regulations which prohibit groups from preying on people who won’t be able to pay their loans, this practice still happens in some instances.
Further, only work with lenders who are very forthright and informational about their practices. You should have an extremely solid understanding of what you’re getting into. That means your rates, your repayment plans, any potential fees, and anything else that plays into your loan should be easy for you to understand.
Once you’ve identified your lender, write out a brief plan of how you would potentially pay the loan back. Make sure the numbers add up and tuck that plan away for the rainy day when you have to take out a loan.
Having this plan in place will greatly improve your odds of working with reputable lenders and paying back your loans without accruing extra fees.
Only Take Payday Loans if You Can and Have to
Finally, we highly suggest that you only take out a payday loan if you’re positive that you’ll have the money to pay it back right away. If there’s any doubt in your mind, we recommend staying away.
The interest rates and late fees are so high that they begin to pick up like a snowball rolling down a hill. If you’re already in the position of needing to take out such a loan, the last thing you need is an ever-increasing mountain of debt to deal with.
So, make sure that your next paycheck is going to cover the total of your repayment plan.
Further, don’t take out loans just for fun money or things you don’t desperately need. If you can hold off on the loan, do your best to do so. Ultimately, the point is that you’re thoughtful and responsible about these loans.
They can save you from a great deal of trouble, but they can also dig you a hole if you aren’t careful.
Want to Learn More?
If you’re leaning toward taking out a payday loan, it’s time to get informed and start planning. A little preparation goes a long way when you’re avoiding financial trouble.
Explore our site for more information on payday loans, business loans, and more.