We hear a lot about payday loans and there are many stories in the press about how badly some people have been stung by them. However, there are now regulations in most countries covering this type of lending so the charges are not as high as they were. It is still not always clear as to whether there are the type of lending that should be considered and so some of the advantages and disadvantages are explained below.
Payday loans were designed to provide emergency funds to individuals who had a poor credit rating and could not borrow from elsewhere. As an alternative to a loan shark, being evicted or cut off, they could be a useful resource to have available. If you have no other form of borrowing available, then a payday loan, which will not do a credit check, will be able to let you have some money. In a case where you need to pay a bill or else you risk being evicted from your home or having a service cut off or you need to feed your children, then it can be useful. Having a bit of money available which may not be otherwise can be very handy, especially if it helps pay for your basic needs.
A payday loan is a short term loan which means that you only borrow the money until your next payday. This means that it is likely that you will only be in debt for a few weeks. This is a great advantage to those people who do not like the idea of having a debt hanging over them. With a direct debit set up to automatically pay the debt back when you get paid, you do not even have to remember to make the payment as it will just happen. This means that even if you are forgetful, you will know that the loan will be paid off in full, as long as the money is there to pay it on the agreed day.
Some people like the freedom of having a short term loan which means that the debt is not hanging over their head for a long time. Many other small loans, such as overdrafts and credit cards do not have to be cleared quickly and the fees can add up and this can make these sorts of borrowing more expensive as well as more stressful.
A payday loan can be organised really quickly. The money can be available within a few hours in some cases and this means that if you have an emergency and need money really quickly, you will be able to get it.
Payday loans do have a reputation for being expensive. They are one of the more expensive ways of borrowing although some things, such as an unauthorised overdraft can be more expensive if it is left unpaid for a long time. The fees and the interest can really add up and if calculated as a percentage of the amount that you borrow is high compared with other ways of borrowing. If you do not pay on time, there will also be other charges and fees which will be higher too.
As there is no credit check for a payday loan, they can be given to anyone even the most vulnerable. There are concerns that those with mental health problems or those that are not good at managing their money could borrow too easily and get themselves into financial difficulty. There are worries that it appeals to those who already have difficulty managing their money and so they will be unlikely to be able to manage the repayments and could end up paying much higher charges as a result.
As the process is so fast, it is difficult to reverse it quickly and so if the borrower does change their mind, it could be too late and they may still have to pay some or all of the charges. This means that if the decision to borrow was made quickly, because of panicking about a bill or feeling out of control and making a poor financial decision.
It can be seen that, like with any type of lending there are pros and cons. It is important to weigh them up and compare this type of lending with other types to see which will be the best for you. It is worth also making sure that you really need to borrow the money in the first place, if you have savings or can wait then it is best not to borrow as it is expensive whichever method you choose. If you need money to pay a bill, then it is worth trying to negotiate first and delay paying until you get your next income coming in so that you can pay it without having to cope with the expense of a loan.