Even if you don’t qualify for a personal or traditional loan, you can still get the financial relief that you need when faced with an emergency that raises the need for cash. In such cases, your best bet is to consider payday loans as they are easily accessible.
What are payday loans?
A payday loan is a kind of loan that is meant to be cleared in under one month or when the borrower gets their next paycheck. Generally, the idea of a payday loan is to act as an advance on a borrower’s paycheck. The borrower will then use their next paycheck to pay off their loan.
Payday loans are not meant to be used for huge expenses such as houses or cars – most borrowers get payday loans to cover minor expenses such as rent, medical bills, utility bills, etc. The size of the loan that you can qualify for is typically determined by the size of your paycheck.
How does a payday loan work?
It’s highly recommended that you try to understand how any kind of loan works before applying, to avoid making the wrong decision. As mentioned earlier, a payday loan is basically an advance on your next salary.
The lender offers you an amount that is typically lower than your paycheck size so that you can pay the loan in its entirety when you receive your next paycheck. If you fail to pay the loan in its entirety by the repayment date, you become subject to additional deals or costs.
The pros and cons of payday loans
Even though it’s no one’s wish to apply for a loan at any one time, there are times when the inevitable happens and you just have to get some financial assistance. At such a point, you have to familiarize yourself with the pros and cons of the loan to help you make the final decision.
Pros of payday loans
The following are some of the reasons why you may not want to despise applying for a payday loan:
1. Quick cash
If you literally need a loan in less than 5 minutes, then you should opt to get a payday loan. These loans, unlike traditional loans, don’t have lengthy processes. Most of the time, all you need to access the loan is a driver’s license, a monthly salary, and access to a savings or checking account. This can be a very good thing if you’re in a tight situation and you need to make a quick payment.
2. You won’t need a good credit score
When applying for a payday loan, your credit history is usually not verified most of the time. What this means is that you can qualify for a loan even if your debt service ratio or credit score is not the best.
3. No need for collateral security
Even though payday loans typically attract higher interest rates, they don’t place you at risk of losing your car, house, or any other valuable assets; that’s not the case with traditional loans.
4. The loan is limited by income
One of the main risks associated with the acquisition of loans is the fact that most people often end up in irrational borrowing. That could be a bad thing, as it can lead to bankruptcy. The good thing with payday loans is that the size of the loan that you qualify for is limited by the size of your income. This prevents you from borrowing more than you can afford.
If you are in need of a payday loan, you won’t have to go to a brick and mortar store. You can enjoy the benefit of completing all the formalities online, in addition to getting to choose how you want to receive the cash. You can opt for a check, or get a direct transfer to your bank account.
Cons of payday loans
The following are the main reasons why you want to avoid a payday loan:
1. They’re expensive
Just because payday loans are small is not an assurance that their interest rates are also low. Payday loans will typically attract higher interest rates to cover for the default risk that the lender faces if borrowers fail to pay. If you default on a payday loan, you shouldn’t be surprised if the interest rate suddenly shifts to double.
2. Won’t help you solve big financial issues
Payday loans are only useful if you want to take care of small financial needs. Beyond that, your best bet is to opt for a traditional loan. A payday loan will simply not be a solution for your debt riddles or big financial crisis.
3. You must have a steady income
When applying for a payday loan, you will have to provide proof of a checking account as well as a reliable salary. Without these, the majority, if not all lenders won’t be willing to give you a loan.
4. Less customer protection and transparency
One of the worst risks associated with payday loans is the lack of enough laws that can protect customer interests. Most companies will set their terms and conditions, which means that the borrower has to stick to the conditions, whether or not they are fair. The rates of lending are not regulated in the majority of jurisdictions. On top of that, most of the lenders are difficult to track since they are either ghost companies or brokers. As such, a double-dealing case is hard to solve.
Payday loans are useful in the majority of cases when you’re pinched for cash. However, you should not always be excited to take the leap due to the ease of application. That’s in consideration that the easiest way is not always the best – you may end up getting stuck with paying the loan for years. Before applying for a payday loan, you should always take some time to consider other options so that you won’t be inconvenienced.