Payday loans are a financial product popular but highly controversial due to the purpose they serve: helping someone out of an urgent need for cash. In this payday loan guide, there will be a comprehensive look at pros and disadvantages, along with the wider implications that come about as a result of using them.
What is a Payday Loan?
Payday loans are short-term, high-interest loans that generally are owed at your next pay. They’re supposed to help pay for unexpected expenses that pop up between paychecks, such as an unexpected bill or car repair. Unlike many other forms of loans, payday loans are usually for relatively small amounts, ranging from $100 to $1,000, and are designed to be repaid in a single lump sum on the borrower’s next payday.
How Do Payday Loans Work?
When taking out a payday loan, you agree to repay the lender in full, plus any fee, by your next payday. The process is remarkably straightforward, wherein you apply, get approval sometimes with the amount and any fees, and then funds get disbursed, mostly as little as 24 hours.
Repayment: You pay back the loan, together with the related fees, on your next payday.
Eligibility
The eligibility criteria for payday loans are relatively lenient compared with other types of credit. Typically, you must have:
    A steady source of income
    A valid checking account
    Proof of identity and residence
Some lenders also require you to be at least 18 years old and a U.S. citizen or legal resident.
Benefits of Payday Loans
There are a number of payday loan advantages, which will prove tempting in urgent positions.
Quick Access to Cash
Among the major positives of payday loans, of course, is how quickly you get access to cash. Many times, you can have the money in a single day and find yourself in a position to be able to take care of emergency needs.Â
No Credit Check
Unlike traditional loans, payday lenders generally do not check for good credit. This means that people with bad or no prior credit can still get payday loans.
Ease of Application
Application for payday loans is pretty easy and, in most cases, can be done online. This accessibility of payday loans attracts individuals who are pressed for time or may be too financially strained to try other more complex financial instruments.
Cons of Payday Loans
Despite all their advantages, payday loans have several serious drawbacks capable of bringing people into financial trouble.
Exorbitant Interest Rates
Payday loans are infamous for their extremely high interest rates and fees. APRs may be as high as over 400%, which makes them a really expensive way of borrowing money. The high costs stand in the way of repaying the loan and create a vicious cycle of debt.
Short Repayment Terms
These loans have very short repayment terms, often as short as two weeks, which is a problem for many borrowers. If you are unable to pay it off during the time period specified, then you may find yourself charged extra fees or taking out another loan to pay for the previous one.
Risk of a Debt Cycle
This creates an awful cycle of debt with the expensive fees added to it, and the very short period that is given for the money to be paid back. When one cannot repay the loan, there is an endless possibility of having to take out another payday loan to pay the previous one. This is how continuous borrowing and ascending debt can become established.
Alternatives to Payday Loans
On the other hand, if a person needs short-term financial relief, then there are certain options available aside from payday loans.
Personal Loans: Personal loans taken from credit unions or banks are generally cheaper and longer in repayment period compared to payday loans. They can be availed for any type of purpose, and in case you need more time to repay the loan, it might be a better option.
Credit Cards
If you have a credit card with available credit, you may be able to use it for emergency expenses. Credit cards have interest rates, too, but the rates are normally much lower than payday loans and you can pay off the balance over time.
Borrowing from Family or Friends
One of the cheapest ways to get urgent expenses covered, if available, is to borrow from family or friends. It may require a bit of openness in communication and an agreed-upon condition for repayment, but at least you will be able to steer clear of high interest and fees.
Credit Counseling Services
Credit counseling services will be able to help you work out a plan for managing your debt and creating a budget. They may also be able to provide you with information about cheaper sources of borrowing and help you develop a plan for tackling financial challenges.
Legal Issues Associated with Payday Loans
Payday loan regulations differ significantly depending on the jurisdiction you are operating within. Some states have very severe restrictions while others offer little in the way of oversight.
Federal Regulations
Within the United States, the regulation of payday lending is left to the states, and regulation varies widely. Meanwhile, the federal agencies have taken certain actions to address some of the problems associated with payday loans. For instance, the CFPB, under the Dodd-Frank Act, has enacted rules requiring lenders in most cases to verify a borrower’s ability to repay a loan.Â
State Regulations
State payday loan laws vary dramatically. Some states have enacted strong protective measures, which include loan amount limits, usury limits on interest rates, and repayment terms. Other states permit lenders to operate under looser regulations that translate into a more costly and less consumer-friendly product.
The Role of the CFPB
The CFPB has been fighting to rein in payday lending and ensure that lenders are operating fairly. In 2017, the bureau issued rules aimed at limiting the risks of payday lending, which include the requirement that lenders verify that borrowers have the ability to repay their loans.
How to Avoid Payday Loan Pitfalls
So, if you are considering a payday loan, here’s how you can take some precautions to avoid falling into a debt trap.
Understand the Costs
Before taking a payday loan, you should be well informed about the cost involved.
You must carefully read the loan agreement and be aware of interest rates, fees,
and the total amount that is to be returned.
Assess Your Ability to Repay
Assess your capability of returning the loan without any delay.
Consider your future expenses and income to see if you can reasonably meet the repayment terms
without further exacerbating your financial situation.
Look for Alternatives
Before entering into a payday loan, look for alternative borrowing options and financial assistance programs. It could include personal loans, credit cards, or other local resources within your community.
Seek Financial Counseling
If you are experiencing financial hardship, you may wish to contact a credit counseling agency.
They can advise you on handling your debts and also assist you in developing
a budget that can get you back on your feet.