Things You Need to Know About Payday Loans

Payday loans are a new innovation in the banking industry that are getting more and more popular every day. These loans are meant to help you reach your next payday without stretching yourself too thin. There are, however, a few caveats that you should be aware of while applying for these kinds of loans. If you have proper financial awareness then you will be able to make better decisions regarding payday loans.

These loans can help you out in the short term but the cost of that help is rather large. This does not mean that you should never take a payday loan, rather you should carefully weigh all the options you have available and then decide if it’s the right loan for you to take.

In this article, we are going to be exploring the various pros and cons of taking a payday loan. By the end of this article, you will have ample knowledge and awareness to make an intelligent choice.

1. Con: High Costs

The number one issue that should bother anyone who is thinking about getting a payday loan is the extremely high costs associated with it. Payday loans are usually short-duration loans and compared to regular loans or even credit cards, the interest rates charged by the lenders are absurd.

If you calculate the average interest rates for all the options available then you will find out that these payday loans can charge as much as 400% interest whereas, the interest rate on credit cards is between 12-30%. This should give you an estimate of how much more money you will be losing if you take a payday loan.

2. Pro: Highly Accessible

Almost anyone can get a payday loan if they fulfill a few basic conditions:

• 18+ years of age.
• Regular source of income.
• Government-issued ID.
• An active bank account.

If you check all of these boxes then getting a loan will not be a very difficult task. You can apply for a payday loan online and the loan will be approved in less than 24-hours. This is a huge advantage for those who need money quickly or can’t easily get loans from banking institutions due to their bad credit, no credit history, or any other reason.

3. Con: Debt Trap Is Not Fun

One of the worst nightmares for anyone with even a little bit of financial knowledge is the debt trap. You can easily fall into a debt trap if you are not careful with the amount that you’re borrowing. 

If you extend your loan then the lender will charge additional fees which will considerably increase over time if you keep extending the repayment period. This will lead to a situation where you will be trapped in a vicious cycle which you can’t escape, you will have to take more loans to finance your existing ones and the interest will accumulate to a large amount.

The only way to avoid this debt trap is to be careful with your spending and understand that saving money is a better alternative to a payday loan. These loans are only to be taken if you urgently need some money instead of borrowing for luxury experiences.

4. Pro: Unsecured Loans

Unlike the traditional loans offered by banks, payday loans are unsecured ones. The lender does not ask for any collateral like your personal property. A bank that holds collateral will simply seize your property and auction it if you fail to make the repayments. 

Payday loans have an advantage since your lender will not be able to seize your assets in case you fail to repay the loan. However, they might resort to other measures which we will talk about in the next point.

5. Con: They Have Access to Your Bank Account

The solution to the problem we discussed above is that payday loan lenders came up with their own techniques. No one can lend you money without the assurance that you will attempt to repay it. 

This is why the lenders usually have digital access to your bank account or a postdated cheque. In case you fail to repay your loan, the lender will resort to any of these methods and try to recover the sum. If your account does not have a sufficient balance then you might face additional hefty charges or worse, the lender will drag you to court.

These were just a few of the many important things that a person should know about payday loans before taking them. Payday loans are perfectly viable for some unforeseen expenditure that can’t be delayed but you should not be taking any kind of loans for luxurious purposes. If you take a payday loan for some purpose that can be postponed then you are setting up yourself for failure. Lastly, just be mindful when taking these loans since it’s pretty easy to get stuck in an undesirable scenario.