Deciphering Payday Loans

Payday loans are debt money from lenders to borrowers, payday loan lenders are for-profit institutions and charge interest and fees to customers taking out a loan. They also may come to the rescue of borrowers when there is a cash crunch. Interest is the payment for allowing these lenders to lend you money. This interest is calculated as a percentage based on terms and agreements agreed upon by the borrower and lender. 

That’s all about the basics of payday loans. So, when would you need a payday loan and when should you save this loan for certain reasons? Do these loans tend to have specialized benefits compared to conventional loans from banks and credit unions? Do they have restrictions on how to use them? What are the benefits and drawbacks in general? Let us find out. 

Payday loan is a viable option as long as you can afford to payback the loan on time. It is used by borrowers to avoid borrowing from places like credit unions, friends and family. It is the money that will come to use when bills, rents and mortgages are overdue. These loans are versatile, easy to get access to and designed to offer cash instantly upon request with a secured collateral of the borrower’s future paycheck.

On average, a loans requires a repayment of $200 every week, which means, most people who are facing cash shortage and are out of control with their finance will also have a hard time paying off this debt. For this and many other reasons, payday debt are not for everybody and should not be taken for granted. 

It is estimated by Pew report that borrowers taking out these loans from individual and institutional lenders usually end up rolling over this debt to another loan and thus causing further dent to their financial portfolio. Add to this loan the accumulated interest and charges and the loan can lead to a complete financial disaster without timely intervention. This makes it good for only emergency cases, and if you are able to repay it, you will have no issue with it.

Rainy day fund or cash cushion is how Pew’s experts term payday loans. Before it used to be every store lending this type of loans to customers in need. Today, these loans can be obtained through online lenders backed by banks and credit unions. Some argue that lending this way lack context. Others see it as a financial tool for people who need cash to pay for unexpected expense or fill the gap between paychecks. Nevertheless, loans are expensive if they are misused or neglected. A typical fee charged by some lenders can range from $10 to $30 for every $100 borrowed. 

While it is okay to use these loans for emergency situations, repairing a vehicle, paying off utility bill or fixing a plumbing issue, it is wise to anticipate the aftermath of borrowing such a loan. Our advice is to budget for the expenses and pick an achievable goal of repayment.