Payday loans are a source of short term, unsecured borrowing. They allow a U.S. citizen to borrow up to $1000 and receive the money very quickly, usually on the same day. An applicant will need to prove that they are 18 years old, have a bank account and are in full time employment.
No credit checks are performed so they appeal to those with bad credit, County Court Judgements, defaults and bankruptcy. They help to fill a short term hole in personal finances. The rate of interest charged reflects the risk of default posed to the lender.
Advantages of Payday Loans
- Speed of availability. It can usually be approved and payment received on the same day, subject to the provision of qualifying paperwork.
- No credit check. It is possible for those with bad credit, County Court Judgements, defaults and bankruptcy to borrow money as there is no credit scoring.
- Any purpose loan. No restrictions exist in terms of what the money borrowed can be used for.
- Avoid late mortgage payments. Late payment can result in bad credit so paying on time is important. In certain situations, it can prevent eviction or repossession.
Disadvantages of Payday Loans
- High rate of APR. Interest rates are extremely high and border upon being usury. It represents the most expensive form of borrowing on the market, but it is sustainable provided the money is repaid within the agreed timeframe.
- Paying bills next month. If struggling to make the repayments this month, it will become even more difficult to make any repayments the month after. The interest paid on a Payday loan will leave less disposable income, although this could be overcome by working additional overtime.
- Uncertainty. If a fresh emergency arises it can be difficult to find the money to repay the loan.
- Short term solution. The high APR means that it is only a short term source of borrowing.
Chris Tapp of the Donal MacIntyre programme stated that, "We would only ever want to see people using payday loans if they have a desperate, one off short-term need and there is absolutely no other option."
A payday loan provides a potential lifeline for someone struggling to pay the rent or mortgage. Whether it should be used to pay for a vacation is arguable. Check all other sources, such as borrowing from family or friendsfirst. If one is taken out, make sure that it is paid off punctually and in full.
Readers who are interested in Payday loans may also wish to read about The pros and cons of secured loans and identifying ways to reduce credit card balances.
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