Payday loans are often perceived as the loan of last resort by consumers, lenders and regulators alike. Also known as cash advance loans, payday loans have been used by millions of Americans and show little sign of decreasing in demand.
Despite a number of challenges, payday loans also have several benefits. We will look at both sides of the lending equation to help you make an informed decision.
Bad credit is not an obstacle.
Why do people turn to payday loans? Usually because they cannot get credit anywhere else. Commercial banks and credit unions lend people money based on risk. That risk is based largely upon a three-digit number known as a credit score. If your score is low, most lenders won’t approve your application. However, payday lenders usually do not consider your credit score — just your ability to pay back the loan.
Lenders are accessible online.
Some payday lenders set up shop in neighborhoods, but many can be reached online. The advantage of Internet lenders is that you can do business from the convenience of your computer. This means you can fill out an application online, wait for approval and have monies deposited into your bank account just moments later. It just doesn’t get any easier than that.
Full disclosure is offered.
Payday lenders are licensed and regulated by the states. Each state conducts business oversight and requires that certain disclosures be made by lenders to consumers. The states may cap interest rates, restrict loan terms and provide other oversight to the benefit of consumers. You can check with your state’s consumer credit department to verify that the lender you want to deal with is legitimate.
Interest rates are higher.
No doubt about it that the interest rates for payday loans are higher, even much higher than other loan options. The reason? Risk. Lenders stand a much greater chance of losing everything by lending to you. This fact should not be taken personally, rather it demonstrates that such lenders are covering a segment of the consumer market others have decided to avoid.
Loan terms may be too short for some.
Take out a payday loan and you will typically pay back the loan with interest within two weeks. Most definitely that short term may not be enough for some consumers. Given that is a “payday” loan, it is designed to be paid off the next time you get paid. You can, however, extend the loan term one or more times as per your state requirements. You will pay interest and a fee for each extension.
Not all lenders operate professionally.
Yes, it is true. There are unscrupulous payday loan operators including businesses that should be shut down. Fortunately, your state government handles complaints and conducts audits, with an eye to correct problems as soon as they are alerted or identified.
Clearly, payday loans are not for everyone. Nor should they be avoided because of potential abuse. As a consumer, you should always be informed. Carefully review any loan agreement before entering into a consumer contract.