What are Payday Loans – A boon or A Bane
A payday loan is a short-term, high-interest loan, offering instant cash up to $1500 as per individual State Laws and Regulations in U.S. which is enough cash to bridge the gap between paychecks to handle emergency cash needs. As per the Consumer Financial Protection Bureau, these loans are designed to serve small term monetary needs but still give lenders access to borrower’s account or require the borrower to write a check for the full balance in advance, which the lender can deposit on the repayment day. These loans incur high interest rates approximately 400% but State Regulations are always there to put caps on any illegal charges initiated by the lender.
What Is a Payday Loan?
It is a short-term loan that is offered to consumers to meet emergency financial needs through an individual direct lender or affiliate agency and not a bank. Often referred with number of terms such as payday loans, cash advance loans, check advance loans, deferred deposit loans or post-dated check loans, the process is basically the same for these loans whether the consumer chose a payday lender’s store or apply online. The borrower provides basic personal and financial information, request a small loan amount, pay a fee for the loan and receives the cash into your bank account. Loan amounts generally range from $50 to $1,000, depending on state laws. Fees also depend on state laws.
Who Uses Short Term Loans?
According to the Pew Charitable Trusts, 12 million Americans use payday loans every year. It is most common for borrowers who don’t have access to credit cards or savings accounts to use this type of loan. Payday loans with no hard credit check are attracts those consumers the most who have cbad credit or zero credit score. The Pew stats found the following borrowers accusing the payday loans the most:
- Renters
- Earn less than $40,000 a year
- Separated or divorced
- African-American
What Are the Benefits of Payday Loans ?
Payday loans is the best financial aid if you don’t have any other financial sources to arrange immediate funds. For example, you might use a payday loan to pay an unexpected medical bill, car repair or an outstanding utility bill. Because these loans do not require a traditional credit check with any of the credit bureaus, they are easily acquired by all kind of borrowers to meet their emergency monetary needs.
What Are the Disadvantages of Payday Advance Cash Loans?
It is mandatory that a payday loan must be repaid as soon as possible. Many people get stuck into a debt cycle when they are unable to quickly repay the debt and rely on other loan to repay the previous one. If the repayment terms are not met, the borrower is charged expensive additional fees. It is very harmful to be stuck in a payday loan cycle for a long time and can potentially damage the financial health of a consumer. It is true that payday loans are more expensive than other methods of borrowing. In most cases, the APR on a payday loan goes to approximately 400% however APRs for credit cards range between 9% to 30%; and further personal loans have lower APRs than credit cards. So, if possible, it is better to use a credit card or use savings in emergency cash needs.
What About Usury Laws?
All the legit states in U.S.A. have specific laws known as “Usury Laws” that regulate the payday lending industry. They regulate the amount a payday lender can lend to consumers and how much they can charge for the loan. The States like New York ban payday lending. Payday lenders are strictly asked to abide to these regulations to continue their business in a state. So, It is important to read the payday loan agreement and understand consumer rights before signing the offer.
What are the Alternatives to Payday Loans
- Receive an advance from your employer
- Use bank’s overdraft protections
- Obtain a line of credit from an FDIC-approved lender
- Borrow money from savings account
- Ask a relative to lend you the money
- Apply for a traditional small loan
- Ask creditor for more time to pay a bill
- Use a cash advance on credit card
If you have evaluated all of the above options and find out that the payday loan is the only option, be sure to understand all the costs and terms before signing the loan agreement.
