A payday loan can be the answer to a short-term financial emergency, where you need instant access to cash. They can make a significant decision when you are pressed for money and cannot wait until your next salary, pension, or benefits payment.
Sudden bills and other financial crises can strike without notice. A payday loan could be a solution to the problem. However, like anything in life, these loans have advantages and disadvantages. Here is a look at a few:
Advantages
Convenience
You can secure a payday loan online without even needing to leave your home or spend time at a lender’s offices. This prospect is attractive to many borrowers who need money right away and do not have time to see someone in-person about getting a loan.
The online forms required by online payday lenders are easy to complete, and you do not need to submit a lot of supporting documentation. However, you will have to prove your age, as it is illegal for minors under 18 to enter loan contracts without an adult signing on their behalf.
A lender would also want to verify your contact details as not doing so risks an inability to reach you. Additionally, lenders want to see that you can afford the repayments, so they ask for proof of your income.
Options
Because there are not many hoops you need to jump through to secure a payday loan, it can take hours instead of days to see the loan amount reflected in your bank account. Online payday lenders have developed a reputation for prompt service and quick deposits.
Whereas a payday loan had to be repaid in a single instalment a few weeks after securing it, lenders now offer various products. For a 900 dollar loan over an amount specified by the payday lender, you have longer to repay the loan. However, the repayment period will not exceed three months.
Credit score woes do not apply
For someone who has run into debt repayment problems in the past, a payday loan is just about the easiest way they can borrow money. Lenders reserve the right to run a credit score check but might still consider loaning the funds despite a less than stellar financial history.
Despite this advantage, a payday lender might opt to charge you a higher interest rate or lend you less than you requested because people with low credit scores are regarded as risky propositions. There is a greater chance that you will not repay the money than there is if someone with a solid credit history borrows money.
Disadvantages
Higher interest rates
Payday lenders charge interest on their transactions as this is how they turn a profit. Therefore, an interest amount will be added to the loan principal and forms part of the repayment. Long-term loans, like mortgages, come with low interest rates. The interest rates charged on a loan increase as its repayment length decreases. Therefore, a payday lender could charge significant interest when you borrow money.
Fortunately, consumer protection laws cap these interest rates and limit the addition of fees to transactions. Borrowers should check regulators’ websites to ensure that their preferred lender sticks to the law. The onus is on the client to insist on having their rights protected.
Loan sharks
Unfortunately, unscrupulous operators have found a lucrative market in the payday loan market. While you might think it is easy to spot a loan shark, their operations might be so sophisticated that you do not realise what is happening until it is too late. Experts advise borrowers to establish the veracity of lenders before committing to loans.
There are several things to look out for in your dealings with a payday lender. If you perceive a degree of vagueness about the loan agreement, interest rates, and repayment amounts, regard this as a warning sign. A lender who is reluctant to commit any part of the agreement to paper or insists on taking something of value from you as collateral or threatening you with physical violence if you do not repay the loan is also suspect.
The debt cycle
Many borrowers have fallen into a debt trap in their dealings with payday lenders. When a payday loan repayment is not within their budget, they default on the loan. Lenders then charge additional interest on any outstanding balance.
Before they know it, people are borrowing more money to pay off existing debt. Unless you are consolidating your debts into one loan, this is not a wise course of action to pursue.
People who find themselves in this continuous debt cycle are often embarrassed about asking for help. However, there are websites and telephone numbers for organisations that help people explore options to become debt-free. Admitting there is a problem might be difficult, but it is better than being stuck in the debt cycle for so long that it is almost impossible to break it.
