You may have heard of a payday loan; you also may have heard of paycheck advances, payday cash advances and a myriad of other names. All of these terms refer to the same thing. A payday loan, in a nutshell, is when you write a post-dated check for the amount a lending company will loan you plus interest for the service rendered. The lender will then wire money into your account and hold the check you have written until the day it is cashable (which is after your next paycheck). The concept is simple, as is the process of attaining this type of loan. Payday loans differ from traditional bank loans in that they are much faster and easier to acquire. A payday loan does not require a credit check – you must only provide your monthly income (on which the amount of your loan is based), have a valid state ID or Drivers license and have been employed at your job for at least six months. The downfall of payday loans is their high interest rates compared to bank loans. For this reason, payday loans are considered to be extremely short term and are not recommend for long-term loans.
Controversy Surrounding Payday Loans
Some advocacy groups warn against using payday loans due to the extremely high interest rates. They believe that these loans target those with a low-income and perpetuate the debt cycle for those who are financially unstable in the middle class. Due to the high interest rates, these loans have even been made illegal or unfeasible in 13 states.
There is much debate between proponents and opponents of payday loans about the legality and ethics behind payday loans. Proponents point to the need for this type of loan option in the market, allowing high-risk borrowers a legal and relatively safe option to access emergency funds that banks would deny them. They also note that the high interest rate is justified given the high number of defaults that are involved with this type of loan, each of which costs the lender a percentage of their total profits. Payday loans also offer unique aid to those who live in disaster stricken areas. Many times, payday loan companies are able to provide loans quickly to those that live in areas that have been hit by natural disasters.
It is extremely important that, no matter what type of lender you choose, you research all that you can about the company and it’s practices. Whether a mortgage, bank loan or a payday loan, being informed is your best tool in any financial situation.
Useful Tips to Know Before You Borrow
If you’ve decided to take out a Payday loan, there are a few things that you should do before you commit to a lender:
1. Know your APR
Some states limit the amount of APR a payday lender can charge. Make sure that your lender is within these limits (if they exist). You can also shop around for the best interest rate.
2. Check Company Reviews
Were other borrowers happy with their decision? You should avoid lenders with overly negative reviews. A simple Google search will often reveal the lenders credibility.
3. Choose the right lender
There are many payday loan lenders, both locally and online. Often times, online lenders will electronically deposit funds directly into your account for added ease
By following these three tips, you will increase your security and reduce your chances of defaulting. Remember, a payday loan is not for everyone but are a good option if you need cash in a pinch. Fast and easy is convenient, but not always necessary. You should always try to get through tough financial times through good budgeting and cash management, but a payday loan is a good option in those times when things fall through.