What is Payday Loans?
Payday loans are a type of unsecured personal loans that is usually lend at a high interest rate on an agreement that the borrower would pay it by his next paycheck. Borrower’s next paycheck is not always used as a unit of calculating of the loan duration, but considered as a context to a short term payback duration. Payday loans are usually provided after the borrower agrees to provide a post-dated cheque of the scheduled loan repayment date, including the interest in the total amount or access to checking account. This assures the lender that the amount borrowed will be received on the scheduled date and that he doesn’t need to chase the borrower after lending.
What are the Advantages of Payday Loans?
Payday Loans come with some great advantages that could come handy during financial emergencies. Listed below are a few advantages of Payday Loans:
Fast Cash – Payday loans are usually processed within few hours, making it possible to get quick money. This is the biggest advantage of payday loans, as time matters the most in case of emergence.
No Credit Report Required – Another advantage of payday loans is for individuals with bad credit history. Since payday loans don’t require a credit report, people with a bad credit report are also eligible to borrow money.
No Affect on Credit Report – Another major advantage of payday loans is that taking a payday loan will not affect your credit rating, as it doesn’t reflect on your credit report.
Handy in Short-term Needs – Payday loans are extremely handy when you have a short term financial need such as paying bills or rent. This helps you save on the interest & fees you might have to pay in case of bounced check or late payments.
Convenient – The biggest advantage of Payday loan is that it is convenient as one can easily apply for a payday loan online.
What are the Disadvantages of Payday Loans?
Just like every good thing, Payday Loans too come with their own set of disadvantages that might make you want to stay away from these easy access loans:
High Interest Rate – The biggest disadvantage of payday loans are their high interest rates, that are higher than most of the loans in the market. The interest rates on payday loan can be anywhere between 300% to 900%, which compared to the average interest rates of other loans & borrowings, makes it particularly over-priced. You might want to consider cheaper alternatives like credit cards or secured personal loans instead of the interest heavy payday loans.
Eligibility – If you are unemployed or receiving social assistance, you might not be considered eligible for a payday loan. You might be required to be at least part-time employed in order to get a payday loan, this is another disadvantage of payday loans.
Extended Repayment Period – Owing to the incredibly high interest rates, most of the borrowers end up extending their loan period to make it possible to pay off their debts. Though this is one of the major disadvantage for the payday loans borrowers, it is one of the highest profit contributor to lenders as increased loan term leads to extra interest earnings.
Access to Checking Account – In case of unavailability of a savings account or a checking account, you might not be able to benefit from payday loans. An additional disadvantage of payday loans, it is essential for an individual to own a checking account to be considered eligible for a Payday loan.
Trustworthiness – It is essential to be very alert & aware while borrowing from a payday loan lender, unlike bank loans, you are not dealing with a financial institution here. For Payday loans, you are dealing with an individual or a private company who could get you stuck in the loopholes & drawbacks of the contract terms.
Loan Amount – Unless your need is of a small amount, payday loans won’t be of much help to you. Payday loans lend small amount of money as loans, usually not more than $1000, which might not be enough for a borrower in need of a bigger amount, this is a considerable disadvantage of Payday Loans.
Payday loans could be handy when you are in immediate need of money and have confirmed funds flowing in before the payback date. e.g. if you have to pay your rent but your payday is a week away, you could take a payday loan which you can payback the day you receive your payment. But even in the most urgent scenarios, try avoiding payday loans and look for alternative like borrowing from a relative/friend or using your credit card to save yourself from the trap of high interest rates.