Pros And Cons Of
pros and cons of
Payday loans are often advertised to borrowers looking for quick and easy access to cash without barriers like a hard credit inquiry. But they also have a reputation for high interest rates and short repayment periods that can keep borrowers in a cycle of debt. Before you jump into a loan, it’s important to weigh the pros and cons of
A payday loan is a type of loan that is usually between $100 and $1,500 that must be repaid within two weeks in a lump sum on your next payday. They’re marketed to borrowers who need cash fast since they offer a quick approval process. They also don’t require a hard credit check, which can be attractive for borrowers who have poor or no credit history.
You might need a payday loan if you encounter an unexpected bill or medical emergency that you don’t have cash on hand to pay for.
Some other names for
How do you qualify for a payday loan?
Qualifying for a payday loan is much easier than qualifying for a mortgage or even a personal loan. As long as you’re above the age of 18 and you can provide a government-issued ID and proof of income, you’re more than likely eligible for a payday loan.
Payday loans can be a convenient and quick method to obtain cash between paychecks. This appeals to a wide variety of borrowers since
Payday loans are known for how accessible and easy they are to obtain. Gone are the days of going in person to the bank or credit union when you can simply do all your banking online—this also applies to
An online application process for a payday loan can be useful for those who need cash quickly and easily. A quick search can locate online lenders who are ready and available to borrowers. Many lenders offer online applications that can be completed in 10 minutes or less. Since they don’t require a hard credit check, many borrowers are approved for a payday loan right away.
Since cash advances are easy to apply for, you can get access to money much faster than you would a personal loan, which can take weeks to get approved for. Some borrowers can even get a payday loan within 24 hours of their application.
Requirements for a payday loan typically include being at least 18 years old, showing your SSN, photo ID and proof of income. This makes it easy for borrowers with poor or no credit history to easily obtain a loan.
You don’t need a good credit score to get a payday loan. In fact, lenders don’t pull your credit report, which would normally involve a hard credit inquiry that may drop your score. For those with bad credit or a lack of credit history, this can be an incentive to borrow.
Unlike an auto loan or mortgage, the lender can’t seize your property if you’re unable to pay. However, they can send your debt to collection agencies or take you to court if you don’t pay back your payday loan.
Depending on your state, you may have high interest rates on your
Other loans like auto loans and mortgages give borrowers ample time to repay their balance. However, the short repayment period of
Payday loans are often considered predatory lending. Predatory lending is when a loan is unfair or unaffordable to the borrower, which can trap them in a debt cycle. Some signs of predatory lending include the lender not checking if you’ll be able to pay back the loan and when the loan doesn’t help you build credit.
When the borrower can’t pay back the loan in a lump sum on the due date, they’re forced to roll over the loan to the next billing cycle, like holding a balance on a credit card. When this happens, the lender can collect more interest fees and keep you in debt. If the debt isn’t repaid within 60 days, lenders can send your balance to a collection agency.
One major downside to
Payday lenders are most common in communities that predominantly consist of minorities. In fact, there were double the number of payday loan sites in Black or Hispanic communities compared to white communities, according to a 2016 study.
Payday lenders also specifically target people of color in their marketing campaigns—over 30 percent of payday lenders’ marketing pictures show Hispanic customers, even though they make up less than 20 percent of payday and title loan borrowers.
Oftentimes when you obtain a payday loan, the lender will give you a fast cash advance if you give them access to your bank account. Unfortunately, some payday lenders will try to take the money they’re owed out of your account without your permission. This is possible since they gained access to your bank account to deposit the cash advance in the first place.
Payday lenders can send your debt to collections if you fail to pay your balance for over 60 days. While payday lenders don’t typically sue borrowers themselves, collection agencies can take you to court if you don’t repay your loan.
If the lenders of debt collection agencies are threatening to sue or use wage garnishment to scare you into paying your balance quickly, you can call a local nonprofit or an accredited financial counselor or credit counselor to help you.
Payday loan practices by state
Depending on the state you reside in, the interest rate on
The map above shows the interest rates for each state that does allow
The top six states with the highest interest rates include:
- Texas: 664%
- Utah, Nevada and Idaho: 652%
- Missouri: 527%
- North Dakota: 526%
States with the lowest interest rates still charge approximately double the principal amount. The five states with the lowest interest rates include:
- Ohio: 138%
- Oregon: 154%
- Virginia: 173%
- New Mexico: 175%
- Minnesota: 200%
- Oklahoma: 203%
Don’t see your state? It might be one of the following states that don’t allow payday loans:
- New Jersey
- New York
- North Carolina
- New Mexico
- West Virginia
Payday loans can cost you a lot more in the long run, so opting for alternatives to save money will be your best bet. Below are some strategies you can use to avoid taking out a payday loan in the first place and ultimately avoid costly interest fees.
Calling your utility company or phone service provider and explaining your situation can buy you more time or help prevent a late fee. Many bill collectors will give their customers a 15-day grace period before you get charged for a late bill payment. Given the high interest rates on
There are plenty of nonprofit organizations whose mission is to help you in times of financial hardship. Obtaining a loan from a nonprofit lender like the Mission Asset Fund is much more advantageous than a payday loan since they charge zero percent interest on loans and they report your loans to the three major credit bureaus.
An excellent alternative to a payday loan is a payday loan alternative (PAL) which has loan terms that range from one to six months for $200 to $1,000, and can be obtained from some federal credit unions. Many federal credit unions will even provide financial counseling to their customers free of charge.
If you don’t qualify for a loan on your own, try to find a cosigner for a personal loan so you can get better interest rates and build your credit. A cosigner is a person who you trust who also agrees to take full legal and financial responsibility to pay off your debt if you are unable to pay. Make sure your cosigner has good credit so that you’re more likely to get approved for a personal loan with an affordable interest rate.
Payday loans have a lot of hidden disadvantages that will keep borrowers in debt. While they might seem advantageous and accessible on the surface, they come with risks that can be more trouble than they’re worth.
If you do take out a payday loan—or any loan—you’ll want to be sure to stay on top of your credit report. Your report should contain accurate information about the balance and payment history for your loan, but incorrect information could unfairly drag down your credit score.