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Pros and Cons of Payday Loans for Borrowers

Pros and Cons of Payday Loans for Borrowers
Kathryn McCoach

Kathryn McCoach

No person is immune from a difficult financial situation. In such cases, having a reserve fund to cover unexpected expenses is essential. However, 78% of Americans live paycheck to paycheck, making it difficult to save or invest after paying monthly expenses.

In addition, saving money takes time, and financial difficulties can arise here and now. Afterward, individuals use a quick and easy way of borrowing – a payday loan.

Approval for a payday loan occurs instantly, making it a smart solution when urgent circumstances arise. But do not forget that this type of lending is considered predatory, justified by high-interest rates and a short repayment period. This causes payday loan borrowers to fall into a cycle of debt.

Thus, it's imperative to stand back to review your financial situation and carefully consider the benefits and drawbacks of this kind of loan. Here's a comprehensive overview of the pros and cons of payday loans.

Table of Contents

  1. What is a Payday Loan, and How Do Payday Loans Work?
  2. What Criteria Do Lenders Consider When Determining Eligibility for a Payday Loan?
  3. Why are Payday Loans Expensive?
  4. Pros of Payday Loans
  5. Cons of Payday Loans
  6. Payday Loan Alternatives to Consider
  7. Make the Decision That Works Best for You
  8. Conclusion
  9. FAQ

What is a Payday Loan, and How Do Payday Loans Work?

Payday loans are small (up to $1,000) loans for a short term. They must be repaid on the next payday or within 10–14 days from receipt. Direct lenders do not check the borrowers' credit history, which allows people to take out a loan even with a low credit score. Verifying your solvency to be accepted is sufficient.

The money goes into the same bank account where you receive the salary. Subsequently, the loan amount and commissions are written off on the next payday. This shocks borrowers accustomed to loan repayments being made in equal installments over a certain time.

Payday loans are governed by regulations set at both the federal and state levels. Each state has laws regulating the size of the loan and interest rates. In some states, such loans are completely prohibited. You can typically get a payday loan from storefront lenders, online payday loan companies, or through credit unions.

What Criteria Do Lenders Consider When Determining Eligibility for a Payday Loan?

To get a payday loan, you need to meet minimum requirements. Applicants must be adult U.S. citizens or permanent residents with a steady source of income. You also need an active bank account to get a payday loan. Some lenders may examine your income level and how it compares to your existing debts to ensure you can meet your financial obligations.

Why are Payday Loans Expensive?

Payday loans are expensive because lenders take a risk by lending money to borrowers with bad credit. A bad credit history indicates a person has failed to pay debt obligations on time. To protect themselves from risks, direct lenders typically charge a flat fee of $10 to $30 for every $100 borrowed. This, coupled with a short repayment period, often makes these loans difficult to handle.

Representative Example

Here's a representative example of a $700 payday loan with a finance charge of 25% ($25 per each $100):

Pros of Payday Loans

Every year, about 12 million Americans take out payday loans. This is due to the minimum number of requirements for the borrower, which allows even people with a bad credit history to receive loans. Several aspects make payday loans appealing to potential borrowers:

Streamlined Application Process

Payday loans allow you to apply online and receive the money without visiting the store. Plus, fast approval means you can get a loan quickly without the need for a credit check.

Quick Access to Cash

An average payday lender allows people to get money the next day, unlike traditional lenders, which take several days to process an application. Some lenders will even give you cash the same day if you get approved by 10 or 11 a.m.

This quick access to cash can be crucial for meeting urgent financial obligations, such as penalties from landlords. It's important to know when landlords report late rent to ensure timely payments and maintain a good rental history.

Simplified Eligibility Criteria

A payday loan can be obtained with a minimum package of documents. This simplifies and speeds up the process of receiving funds. To get a payday loan, you need to present:

Bad Credit is Accepted

You can get a payday loan with a bad or no credit history. Direct payday lenders generally refrain from conducting hard credit inquiries, which can influence your credit rating and approval chances. This opens up payday loans to a large group of borrowers. Additionally, discover whether payday loans can help build your credit.

No Collateral Requirements

Payday lenders cannot take your property away if you don't make payments. However, if you default on your payday loan, they can sue you or send your debt to collection agencies.

Cons of Payday Loans

While getting a payday loan is quick and easy, they come with some features that can lead to a debt cycle. When deciding on a payday loan, you need to take into account their disadvantages:

High-Interest Rates

Interest rates for payday loans can differ because each state has its regulations. However, they are often higher than 300%. Some states, such as Arizona and Arkansas, have banned payday loans altogether, contributing to relief from a cycle of debt for many.

Short Repayment Period

To pay off a payday loan, you need to have the loan amount plus interest in your account balance by the next payday. The loan is repaid in a lump sum rather than monthly payments. This creates financial pressure, especially if the borrower fails to repay the debt on time and faces additional payments and penalties.

Predatory Nature

Predatory loans have unfavorable terms and can send borrowers into debt spirals. Payday lending is often considered predatory due to its short repayment terms and unreasonably high interest rates.

Other signs of predatory lending include the following:

Debt Cycle Risk

If the loan cannot be paid back on schedule, the borrower is compelled to prolong it. Subsequently, large sums of interest build up, placing the borrower in debt. If the debt is not paid back within 60 days, it may be reported to a collection agency or the court.

Credit Score Impact

Direct lenders don't report your application or payments to the major credit bureaus, which means that even if you pay on time, you won't be able to improve your credit score. However, late payments can still negatively impact your credit rating, as they may be reported to the bureaus.

Targeting of Minority Communities

Payday loan lenders are frequently located in areas where minorities predominate. For example, a 2020 study discovered that the number of payday loan establishments was twice as high in places populated primarily by Black or Hispanic individuals as it was in areas populated primarily by White people.

These lenders also focus their advertising on people of color. Over 30 percent of the pictures in their ads show Hispanic customers, even though Hispanics make up less than 20 percent of the people who borrow payday or title loans.

Legal Risks

Payday lenders can assign your debt to a collection agency if you don't pay the due sum within 60 days. Debt collectors may file lawsuits against borrowers who fail to repay their loans. This will ruin your credit history and incur additional costs.

Bank Account Available to Creditors

When you apply for a payday loan, you provide lenders with your bank account information. This can lead to several negative consequences. For instance, if there isn't enough money in your account to cover the repayment, you may incur overdraft or non-sufficient funds fees from your bank.

Even if the balance is sufficient, you might find yourself short on necessary funds for other expenses after the withdrawal, prompting you to resort to loans again and again to cover these needs. As a result, you risk falling into a cycle of debt.

Get a payday loan quick and easy

Payday Loan Alternatives to Consider

After considering the advantages and disadvantages of a payday loan, you need to evaluate your needs and options. If you understand that this is a risky choice for you, it is better to consider other forms of borrowing:

Use Credit Cards With 0% Interest Rate

Try looking for a credit card with a 0% interest rate if you need money quickly. This will help you avoid interest if you repay your outstanding balance by the end of the billing cycle. Just keep in mind that interest on the remaining balance may be high. They add up quickly, resulting in high payments you're not prepared for.

Pay Attention to Alternative Payday Loan from Federal Credit Union

PALs, or payday alternative loans, are more affordable and safer loan options that credit unions offer. The maximum amount for PALs is $2,000, typically lasting between 1 and 12 months. Credit unions offering PAL are subject to strict rules that prevent interest rates from being set above 28%, ensuring that borrowers won't pay exorbitant fees and charges. This makes PAL a more financially responsible choice for individuals needing short-term loan assistance.

This is a good alternative to a payday loan, but you must have been a credit union member for at least a month to receive PALs.

Contact the Pawnshop

Because the pawnshop is not taking any risk, there are not many requirements for a loan from them. You receive money for bringing something of value. After that, you repay the loan within 30 to 60 days. If you don't repay the money, the pawnshop will sell your item to recoup its loss.

Ask Family and Friends for Help

Friends and relatives cannot always lend money, but you should at least ask for help. If your close relative has the amount you need, this will be an excellent alternative to a payday loan. In order not to spoil your relationship with a family member, you can enter into an agreement in which you undertake to repay the debt within a certain period.

Apply for a Personal Loan

You can get personal loans from a bank, credit union, or online lender. This is another option for short-term borrowing. Interest rates on consumer loans range from 9.95% to 35.99%, significantly lower than the estimated 400%. In addition, such loans have longer repayment terms, which allows you to pay equal monthly installments without a hit to your budget.

However, this option is mainly for those with a good credit history. Bad credit borrowers are usually asked to provide guarantors or collateral to qualify. Additionally, the process of obtaining the loan takes more time.

Ask Your Employer for an Advance

You can contact your employer and explain that you are experiencing financial difficulties. The employer may be willing to give you a payday advance to help cover emergency expenses.

Find Ways to Make Extra Cash

If none of the above options suits you, try to find an additional source of income. The first thing you can do is sell personal valuables that you can do without. If you have jewelry or clothes you don't need, try selling them online. You can also use other ways to make money, such as:

  1. Freelancing. Post your abilities on freelance websites like Fiverr, Upwork, or Freelancer.
  2. Drive for ride-sharing or delivery services. If you want to make money giving rides or delivering meals, sign up to be a driver for businesses like DoorDash, Lyft, or Uber.
  3. Teaching or tutoring. Teach a skill like music, painting, or a foreign language, or provide tutoring in the disciplines you are an expert in.
  4. Provide a dog-walking service. If you enjoy spending time with animals, consider pet sitting or dog walking as a side gig.

Make the Decision That Works Best for You

People frequently use payday loans in times of financial emergency, as getting them is not a tough task. However, as we can see, there are plenty of other choices. How, then, do you select the best fit? Find it out using this helpful guide.

Understand Your Situation

First of all, evaluate your needs. Do you have an emergency and need money the same day? Or can you wait longer? An adequate assessment of your situation will allow you to choose the most appropriate option.

Check How Likely You Are to Get Approved

Certain lenders claim low standards for applicants and a high chance of approval. This can be a decent choice if you've been rejected elsewhere and need money. However, it is crucial to ensure the lender has a solid reputation and offers reasonable loan terms.

Be Aware of Any Conditions or Rules

Sometimes, lenders use the term "guaranteed loan". This is bait because no lender can guarantee 100% approval. Yes, these lenders likely have high approval rates, but these loans often have higher rates, shorter repayment terms, and other hidden fees. Ensure you are fully aware of the terms and conditions and don't foolishly trust big promises like "guaranteed money."

Use a Connecting Service

Platforms like ASAP Finance offer a reliable network of direct lenders whose lending terms are as transparent as possible. ASAP Finance operates online and streamlines the loan application process by connecting borrowers with lenders who meet their financial needs and credit profiles.

Assess Your Solvency

Before applying for any loan, evaluate your ability to repay it on time. Consider your income, expenses, and debts to ensure you can manage additional financial obligations responsibly.

Think About the Terms for Repaying the Loan

You have to pay back the loan in addition to taking it out. Select lenders who provide flexible, reasonable, and transparent repayment options. This lessens the probability of getting caught in a debt trap.

Conclusion

You can apply for a payday loan fast and easily at any time. However, choosing the quickest solution instead of the best one may result in you having to spend a lot of time paying off that one debt. Assess the current situation. If you can go without money for a while, then it is better not to take a payday loan. It's also worth exploring alternative ways to get money that may be less risky.

FAQ

Can Payday Loans Impact Your Credit Score?

Since payday lenders don't send reports to the major credit bureaus, your credit score won't change if you apply for a payday loan and repay it on time. However, if the debt is not paid after 60 days, the information may be transferred to a collection agency, affecting the credit rating.

Do I Need to Indicate the Purpose of the Loan When Submitting an Application?

Payday loans have no specific purpose, even if you specify it in your loan application. The online lender does not control whether the amount will be used in the mentioned way.

Where Can You Get a Payday Loan?

You can get a payday loan from online lenders or local payday loan stores in your area. To make the loan process more manageable, you can fill out a loan application on the ASAP Finance platform. Your information will be shared with a network of trusted lenders, so you will access multiple loan offers simultaneously.

Why is a Payday Loan Difficult to Pay Off?

Problems with payments arise due to high-interest rates and fees. In addition, a payday loan needs to be repaid in a lump sum quickly, which is difficult for many.

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