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Overview
Pros & Cons of Payday Loans or Short-Term Installment LoansPayday loans are all over the news today, with many states debating whether they should be outlawed. Movements against payday loans cite that the lenders are predatory, charging exorbitant interest rates and high fees. They also believe that payday lending creates a vicious cycle where customers have to keep withdrawing new loans to get by. People who support the payday loan industry feel they should have a right to make their own financial decisions. They cite how many families come to rely on payday loans for emergencies because they typically cannot get other more traditional forms of credit. Whether you are for or against payday loans, they have their obvious pros and cons. Careful research and prudent borrowing can help customers stay out of the payday loan trap.
Pro: Convenience
Payday loans offer their customers the convenience of quick cash for times when ends don't meet. Many of the borrowers use these lending facilities because they don't have to worry about credit hassles. If you drive through some neighborhoods, you will likely see a payday loan company on every block. They advertise aggressively, making it easy to find one and borrow money. There's a no-questions-asked kind of feeling when you walk inside. No one judges you based on your credit, and no one asks you what you need the money for. It's a simple process that many people find comfort in.
Pro: Minimal Credit Requirements
Payday loans are easy to get. Anyone with a bank account and a job can get one. They don't do credit checks, and they don't require cosigners. All it takes is a short form with a few personal references and a pay stub or two to walk out with cash. The process requires writing two checks, each for half the total amount borrowed, plus fees, in exchange for cash. On your next payday, the checks are deposited and the loan is repaid. It is important to point out that many of the customers at payday lending institutions cannot qualify for more traditional loans or credit cards, and therefore have little other recourse when they need to borrow money.
Pro: Quick Approval, Quick Repayment
The whole process is exceptionally fast, especially if you are a repeat customer. The longest part of the process is waiting in line. If a customer comes into an emergency situation, like a broken appliance or an emergency medical bill, the money can be available in less than an hour. The borrower doesn't even have to come back to the facility to make a payment. Her checks are simply deposited, and the money is withdrawn from her account.
Con: High Interest Rates and Fees
Possibly the biggest drawback of payday lending is the fee. It costs anywhere from $10 to $20 per $100 to borrow money. That means if you borrow $100, you are paying back $110 to $120, and if you borrow $500, you are paying back $550 to $620. If you calculate this fee out for a 12-month span, it is an interest rate of roughly 200 percent or more. This is an exceptionally high price compared with rates of more traditional loans, but many payday loan borrowers feel the benefits outweigh the fees.
Con: The Vicious Borrowing Cycle
The ease of borrowing money in an emergency makes it even easier to to borrow money when it may not be entirely necessary, or to borrow more money than is actually needed. Because high loan amounts can eat most or all of the customer's paycheck, it can be necessary to take out another loan for necessities like food and rent. This cycle can continue for months, until it seems like the customer will never be able to get out of the loan cycle.
Cons: Damange to Bank Account or Credit Rating
If a payday loan repayment check doesn't clear the customer's bank account, it will likely incur bounced check fees from the bank and the lending institution. Often, the lender will try to deposit the check several times, leading to several fees, and sometimes closure of the account. When a person's bank account is closed in this manner, it can be very hard to open a bank account in the future. Continuous bank account errors can adversely affect your credit. Now the customer has a double problem: collections processes on behalf of the payday lender and the bank.
Tips to Use Payday Loans Responsibily
If you chose to use a payday loan service, always make sure to borrow the minimum amount to cover your emergency expense. Pay it back right away, and resist the temptation to borrow again when your next paycheck comes. If you cannot pay back your loan, be sure to talk to your lender and your bank about options for repayment. Some states have laws that require payday lenders to allow customers to pay in low monthly installments. Lastly, make sure you are aware of all fees and charges associated with your loan and all due dates of payments. Using payday loans as an occasional service rather than a lifeline will save you a lot of money in the long run.
