What are Payday Loans?
Typically, a payday loan is a small-dollar loan with a 2-week term to be returned by the next paycheck of the borrower. This type of loan is sometimes called a cash advance, paycheck advance, or deferred deposit transaction. For the repayment of the loan, either a postdated check with full balance including the fees or a letter of authorization to the lender to electronically debit the amount from the bank, prepaid card, etc. This is to make sure the borrow returns the principal amount and fees incurred on time. As you might imagine, this type of loan is for people in need of quick cash. Generally, the borrows don’t have an excellent credit history. Although such types of loans are criticized by financial experts, there are few advantages. Let us explore the pros and cons of pay loans.
- They are not very difficult to access. Some lenders are ready to offer cash within hours of the applications. There is also some lender that accept online applications. Other types of loans might require a social security number, proof of residence, proof of income, etc. Typically, these types of advance loans have applications that don’t require much time or effort to be filled out. As the cash is backed by a check or authorization letter, and it is a small-dollar amount, lenders are not bothered to have a detailed application process. All you need to be is of 18 years of age, have a government-issued ID, and an active bank account. There is no security required for the loan that means if the borrower defaults, the lender can’t seize the property as a consequence.
- The other advantage of an advance cash loan is that lenders don’t bother checking your credit score. For some people who suffer from bad credit history, this could be a blessing. When an emergency strikes that require quick cash and your credit is bad, “quick cash” loans are not a bad option to have. Also, keep in mind that every time a credit report is run, your credit score dips by a few points. So with advance cash loans, your credit score doesn’t take any hit.
- Financial advisors criticize payday loans because of how expensive they can be. The interest rates can be as high as 400%. Compare that to a credit card (which is not so popular with financial advisors) that is less than 30% in most cases.
- The high-interest rates can start a debt cycle, which can be difficult to get out of. If the lender is not able to pay back, the lender charges additional fees and it starts to become a scary debt cycle.
- Some believe paydays loans can be a bit predatory as it targets communities or individuals who don’t have many options. They don’t have a good credit score or enough cash saved up so they are kind of forced to rely on these types of quick cash loans.
- The lenders can sue the borrower for the money they owe. The lawsuit could end with a wage garnishment or other more serious consequences.