A payday loan is a form of short-term debt that doesn’t require any collateral assets. The interest rates tend to be higher than personal loans because the debt is paid over a shorter period of time (around 7 to 30 days). However, the rates will still ultimately depend on the borrower’s income.
Although payday loans are classified as ‘unsecured debt’, lenders are willing to approve borrowers easily if they have a consistent income from employment. The loan principal is paid off by a portion of the borrower’s monthly paycheck.
Advantages Of Payday Loans
Here are the advantages of availing payday loans:
- Quicker solution compared to other loan choices. If you are in immediate need for cash, payday loans can be one of the fastest modes of borrowing. In many cases, funds can be released in as little as one (1) business day or even a few hours in some cases. This makes payday loans an ideal financial solution for emergencies and urgent cash requirements.
- Potential to borrow higher amounts over time. If you build a good enough history of timely payments with a payday loan lender, it is possible to get approved for higher amounts in the future.
- Convenience. A lot of payday loans do not require you to apply personally and face a lot of credit checking. You may apply online and from the comfort of your own home. Once approved, funds can be transferred to your account in no time.
Disadvantages Of Payday Loans
Though quick and convenient, payday loans have their own share of disadvantages as well:
- Higher interest rates and fees. The interest rates for payday loans, if turned into an annual percentage rate (APR), can be as high as 200% to 300%! Of course, loan terms for payday loans are usually just two to four weeks. But it can have a big impact on your finances if done repeatedly over the course of a year.
- Can turn into a debt trap. Being reliant on payday loans every month can lead borrowers into a ‘debt trap’. This is when people avail of multiple payday loans from different lenders just to get by every month. Ultimately, they incur a lot of interest that they could no longer repay eventually.
Who Should Avail of Payday Loans?
Financially strapped individuals who do not have credit cards are perfect applicants for payday loans. If you are expecting money from a consistent income source but need to pay an immediate short-term obligation, a payday loan is a good option.
What you’d like to avoid is to depend on payday loans for your major financial needs. But if you use it only for emergencies and urgent spending, it is generally safe.
What To Consider For Taking This Kind Of Loan
Make sure that you are clear with the lender regarding rates and fees associated with the payday loan. Some lenders have hidden fees and charges not seen in the original offer. Be vigilant in this area and ensure that you know what you are signing up for.
Payday loans are not intended to be used as permanent credit line. If you need a more consistent source of credit with predictable fees, consider getting a secured credit card instead.