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The Pros and Cons of Using Payday Loans

by fat vox

There is a lot of controversy surrounding the payday loan business. For those of you who are not familiar with the concept, payday lenders will give you a small amount of cash, usually somewhere between $50 and $500 (sometimes more), in exchange for a post dated check. When your next payday comes around the loan is due in full, principle plus interest. Sounds like a pretty good deal, right? According to sources such as U.S. News, payday loans are predatory loans designed to take advantage of people who cannot get loans from other sources. However, the Community Financial Services Association of America, or the CFSA, has shown that the payday lending industry have had a positive impact on the consumer finance industry. Take a look at some of the opposing viewpoints:

Payday Loan Pro 1:

Payday loans are easy to get. You have probably noticed that there are as many payday outlets in your neighborhood as there are grocery stores. This means that if you find yourself in a financial pickle you are never more than a few minutes away from a few hundred dollars. And, if you are concerned that someone you know might see you entering or exiting a payday advance location, you have the option of applying online.

Payday Loan Con 1:

Some online payday lenders are scams. You have to supply the lender with all sorts of personal information including your name, social security number, your driver’s license information and your bank account number. This, coupled with the relative anonymity of the online landscape, provides unscrupulous conmen the ability to hijack your identity without fear of being caught and prosecuted. It is important to do your homework when it comes to getting an online payday loan to ensure that you are doing business with a reputable company.

Payday Loan Pro 2:

Payday loans can be obtained by anyone with a steady income and an active bank account. Payday lenders don’t run credit checks so as long as you can prove that you are getting an income from employment or government assistance program or even a pension and/or social security and have an active bank account, you are approved. During the application process you will need to provide proof of your income as well as proof of the existence of a bank account and the names of a few references, but that’s about it.

Payday Loan Con 2:

Payday lenders don’t care if you have the ability to repay your loan. They don’t care if you are making a bad financial situation worse. If you choose to default on your loan, they have the check that you wrote as collateral, which they will cash, possibly overdrafting your bank account, resulting in even more fees due to insufficient funds. Defaulting on your loan can result in being taken to court and having to pay court costs along with the loan, interest and additional fees.

Payday Loan Pro 3:

Payday loans have a higher interest rate than most other loan products; however this higher interest rate is generally expressed as a flat rate dictated by the amount of money you choose to borrow. These fees are high but are generally less expensive than two overdraft charges levied by your bank or the long term amount you’ll pay over time with a longer term loan.

Payday Loan Con 3:

If you pay off your payday loan in the first or second cycle then they will remain cheaper than many other loan products out there. However, the sad fact is that most borrowers don’t do this. Payday loans are designed to be paid off within 1-4 weeks, however after you pay off your loan, you have the ability to get a new loan immediately after. In essence, you are only paying the interest if you “renew” your loan and unless you pay additional money against the principle; your balance never goes down. This is a cycle that many payday loan customers find themselves in: taking out a loan, paying off the balance and then entering into a new loan immediately thereafter. This cycle traps many borrowers and ultimately costs many of them thousands of dollars in interest.

The fact is that payday loans are extremely useful loan products that can help borrowers address a short term financial need without the hassle of qualifying for a loan, pledging personal property or making regular monthly payments, as long as they are used responsibly. Getting a payday loan does not depend on a borrower’s credit nor does the loan affect your credit positively or negatively unless you default on the loan. However, you must be careful with whom you choose to do business with and that you have the means to pay off the loan in the specified loan term in order to make it cost effective.

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