In the last decade one of America’s most booming businesses has been companies that specialize in offering payday loans. It is not uncommon to see several different payday loans in nearly every city in the US. Payday loans organizations offer short term loans that are to be paid back, with interest, on the borrower’s next payday. While these types of loans can come in handy if a person finds themselves in a financial bind, there are both good and bad aspects of the loan process.
Advantages of Payday Loans
Payday loans can provide a person with instant cash if they have an unexpected expense occur that cannot wait until their next pay date. If certain expenses such as auto repair bills, unexpected medical needs, or possible disconnection of utilities come up and a person finds they do not have the funds to cover them, a payday loan can help them out of a tight financial spot.
Fortunately, these types of loans do not normally require a credit check and can be obtained rather quickly. As long as the borrower has an active, open checking account that does not have a negative balance, proof of regular, recurring income, some proof of identification, and a few good personal references, a payday loan can be easy to obtain. If they have all of these items on hand when they go to the payday loan business, it is possible for a loan to be completed within one hour or less.
Disadvantages of Payday Loans
While payday loans may seem like a great way to have easy money on hand in a very short amount of time, there are some downfalls. Depending upon the borrower’s paycheck frequency, they will be required to pay the loan back in full within one week, two weeks, or one month. Not only will they be paying back the amount that was borrowed, but there will also be a fee charged by the payday loan business for processing the loan.
Unfortunately, this is where getting a payday loan can begin to get ugly. The fees charged by the payday loan business can be rather large amounts. Most of these businesses charge up to $17.50 for every $100 that is borrowed. For example, if a borrower receives a $300 loan, they can expect to pay back an average of $352.50 to buy back the check that was written to the payday loan company. If the loan is not paid back by the end of the business day on the prearranged due date, it will be sent to the borrower’s bank to be withdrawn from their checking account.
Pros and Cons of Payday Loans Summary
If obtaining a payday loan is a one time occurance, that is paid back in full with no problems on the borrower’s next pay date, it can be a helpful service. However, the real problems begin when borrower’s find themselves agreeing to pay back more than what is feasible for their budget. If most of the borrower’s next paycheck will be spent paying back the payday loan, they may have no choice but to get a second payday loan in order to have enough funds to get by on until their next paycheck arrives. This is how the vicious cycle begins and the borrower may end up repeating the loan process over and over for several months or possibly even years.