Payday loans: The pros and cons
Most of us know what it feels like to deal with unforeseen circumstances when we don’t have the finances to take care of the problem.
We typically first turn to friends and family for help. If they can’t assist, a short-term loan is our only option. So, we usually go online and generally click on options like ‘payday loans, no credit check.’
These types of loans were designed to help you get out of emergencies. However, more often than not, this creates long-term financial problems. So, even though online vendors such as these will provide you with the cash you need without doing a thorough background check, you have to ask yourself the question: “What’s the catch?”
To enable you to make an educated decision, you need to explore the pros and cons of payday loans.
Payday Loan: What It Is and How it Works
In theory, it’s a small-dollar loan typically ranging between $100 and $1,500 with a two-week term. The full amount, including the interest charges, must be repaid on your next payday.
The lender will generally require you to sign a post-dated check or that you provide them with authorization to debit your bank account. Should you fail to repay the loan in full on or before the due date, the vendor is entitled to either cash the check or electronically withdraw the funds from your account.
Unfortunately, these lenders target people with little financial literacy with a poor or no credit score, who need fast access to finances in an emergency.
Despite frequent negative consequences, people still turn to payday loans. Here’s why:
- Quick approval and fast cash, typically within 24 hours
- There are fewer obligations than other loans: You need to keep in mind that the additional requirements from other institutions were put in place for your protection
- No credit checks: Hard credit inquiries can lower your credit score by several points
- The vendors provide unsecured loans
- It can help you out of emergencies
If you have no other choice than to take out a payday loan, limit it to the exact amount you need to get out of your predicament. The following are the reasons why this is essential:
- It’s expensive: These loans typically have an APR of about 400%
- They’re harder to repay than traditional loans: These lenders don’t assess your debt-to-income ratio, which often makes it challenging to repay
- This form of lending is considered to be predatory due to unfair, misleading, and unaffordable terms that can trap the consumer in a cycle of debt
- Low income, minority communities are often targeted
- In general, they request access to your bank account
- The lender is eligible to sue you for the money if you default on payment
- You can’t build a credit score with it
The Bottom Line
When you find yourself in dire straits, taking out a payday loan may seem like a convenient way to deal with your problems. Even so, the cons far outweigh the pros. Without carefully planning your finances, you run the risk of falling into a debt cycle, which isn’t cheap to get out of.
Make sure this is your last resort for getting your hands on urgent funds.
Story by David van der Ende