February 11, 2021

How Can Payday Funding be Useful but Risky Too?

By : Ellie Brown

In today’s times, everybody is dealing with some or other financial issues. Having multiple expenses and stuck in various debt cycles. Generally, people tend to drown in a financial quagmire.

However, many financial institutions nowadays are available with financial aid to cater to their financial needs.

Many types of loans are available in the market such as personal loans (unsecured and secured), payday loans, title loans and many more. Many financial institutions offer first direct loans too to fulfil the financial requirement of individuals.

Payday loans are one of the in-demand loans because of their easy availability. These loans are also known as short term loans.

Although these loans are readily available, they have gathered a lot of criticism for them. As per the critics, these loans trap people who are in dire financial need and engage them in vicious debt cycles.

So let us see the truth behind these payday loans. This blog will take you through both advantages and disadvantages of borrowing payday loans.

Before applying for any payday loan, it is imperative to understand its repercussions. Before getting into debt, be aware of all the terms and conditions and gather all the essential information.

Payday loan

In Payday loans, the principal amount and the repayment time, both are lesser than the other available loans. The amount of a payday loan ranges from $100-$1500.

The period to repay the loan also ranges from 1-2 weeks. With these features, payday loans are also known by many other names:

  • Payday Advance
  • Paycheck Advance
  • Bad Credit Loan
  • Cash Advance
  • Short Term loan
  • Fast Cash Loan

Payday loans- Advantages

Despite all the disadvantages, payday loans are still preferred by people because of the following reasons:

  • Easy availability

Easy availability is one of the prime reasons for its inflated demand. Payday loans can be easily availed from anywhere, anytime and anyplace. There are very fewer requirements while applying for a loan. It involves a flexible application process and less paperwork, unlike conventional loan procedure.

  • No Credit check required

Credit rating plays a significant part in receiving a loan. But, borrowing a payday loan requires no credit check. Generally, payday loans don’t pull out any credit, so there is no need for your credit check.

Also, banking history is not required as there are no hefty amounts involved. Payday loans are for everybody. People with low incomes and poor credit score are also eligible for applying for a payday loan.

  • Unsecured in nature

Payday loans require no collateral or security for borrowing. No asset or property to apply for a payday loan. This also proves to be beneficial for a borrower as if you are unable to pay your loan. The lender does not stand a chance to seize any of your property in return.

No asset but lenders do have some access to your bank account. So, in case of a non-payment, you may expect a lender to bother you and may report it.

  • Fewer requirements

Unlike payday loans, traditional loans require lengthy paperwork, registration of numerous documents, various proofs of different people, and many more.

On the other hand, payday loans have minimal requirements and are just offered on the identity card.

The registration for payday loans requires minutes to complete the process. The only condition is to be a working professional and above 18 years of age.

Payday Loans- Disadvantages

  • Expensive

They come with a hefty price tag irrespective of their smaller amounts and shorter repayment durations. Payday loans have a higher interest rate in comparison to traditional interest rates.

In some states, interest rates on payday loans may rise up to 400% compared to credit card interest rates that range from 12-30%. 

  • Might lead to a debt cycle

These loans may have shorter repayment terms of 1-2 weeks, but extending the repayment time may attract additional fees. You may end up paying more than the actual amount borrowed.

Hence, it is advisable to not delay or drag your payment timeline for more extended periods. You should weigh all the consequences before applying for a payday loan.

  • Trap for low-income households

Like mentioned earlier, low-income households are an easy target for payday loan lenders as they are always in a financial need. Since these are short term loans making them best suitable for little income households.

According to research, the majority of the borrowers include African Americans because of their financial status. This indicates more of black communities being involved in short term borrowing as compared to the white community.

  • Infamous payday loans

The essential characteristic behind these loans is to trap people in a debt cycle as they are considered unaffordable by many people.

These loans attract a lot of criticism of being misleading, unaffordable and preferential. Financial experts prefer these loans as they have high-interest rates. Also, lenders before offering do not question about the loan payback amount. 

The final thoughts

Considering both pros and cons of these payday loans, it is advisable to weigh both the sides and then apply for a loan.

Before applying for a loan, it is essential to analyze your payment capacity. In today’s times, every individual requires money for some reason and financial problems trouble almost everybody. So analyze your situation and decide wisely.

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