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Overview
What Are the Disadvantages of a Payday Loan?Payday loans are loans that are borrowed against your next paycheck. These are short-term loans designed to help quickly supply money without a credit check, deposit or equity such as a car. Though these types of loans are handy for emergencies, there are certain criteria required by payday loan companies that may put you at a disadvantage.
Immediate Payback
Since payday loans are borrowed against your next paycheck, they have to be paid back on, or a few days after, your payday. This means that you have to pay the whole thing back in less than a month's time. If you have an unexpected expense come up or your paycheck is smaller than expected, then paying back the loan in such a short time may be difficult.
Cost
Most loan places will require that the loan be paid back plus around 140% interest. For example, if you borrowed $255 on a 14 day loan, you would have to pay back $255 plus $45 in interest. This is a steep amount of interest for only keeping the money for 14 days.
Checking Account
To be able to get a payday loan, most companies require a checking account so that you can write them a postdated check. When your pay date comes, the loan company cashes the check. If you don't have a checking account, this can be a problem.
Proof of Employment
You also must have proof of employment in the form of a pay stub. If you are new employees and have not received a pay stub yet or if you are self-employed, you will have a hard time getting a payday loan and they may reject your application.
Default
If you default on a payday loan, most loan companies will sue you within six months if payment arrangements are not made. They will file a claim with your town's small claim's court. The court and the company will send you a letter informing you of the lawsuit.
Percentage
You are not able to borrow as much money as you want. You are only allowed to borrow a certain percentage of your overall income. This percentage varies from state to state and is determined by how big of a percentage a person can reasonably pay back within that given amount of time. So, if you need more than the payday company is legally allowed to loan you, you will have to look elsewhere to make up the difference.
