Depending on your financial situation, you may begin to ponder the pros and cons of payday loans.
Before we discuss the specifics, let’s review a basic definition of a payday loan (as shared by Consumer Financial Protection Bureau):
“While there is no set definition of a payday loan, it is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday.”
With a variety of pros and cons, you need to compare the finer details of payday loans before you make a final decision.
Benefits of a Payday Loan
Here is a brief list of the top benefits associated with a payday loan:
- Ability to secure the money you need, regardless of your credit score
- Access to fast cash (typically within an hour) if you require funding in a hurry
- The application process typically takes 15 to 30 minutes
- Depending on your location, you can apply for a payday loan in person or online
Drawbacks of a Payday Loan
While the benefits of a payday loan are hard to pass by, there are some potential drawbacks that could impact your decision:
- Higher than average interest rate
- Added expense of interest and fees can put you in a worse financial position down the road
- High interest rate often leads you to take out one payday loan after the next
- Lender favorable terms
Features to Consider
On the surface, a payday loan is cut and dry. You borrow money and pay it back, with interest, on your next payday. While this is the basic approach, there are other details to keep in mind:
- A payday loan is not the right solution if you need to borrow a large amount of money. Most the time, these loans are less than $1,000.
- A payday loan is not an installment loan, but typically repaid in one lump sum when you receive your next paycheck. The due date is specified in the agreement you sign, so be sure to check this.
- Repaying the loan is something you guarantee at the time of signing. Most the time, you write a post-dated check for the entire balance, including fees, or you give the lender the authorization to debit the amount from your bank account.
- You can take the proceeds of the loan in many forms, with electronic deposit, check, and cash the most common. Some payday lenders also offer to load the money onto a prepaid debit card.
- A payday lender doesn’t look at your credit history. For this reason, they don’t know if securing the loan is a bad financial move.
Before applying for a payday loan, you should compare the pros and cons with one eye toward the overall cost.
Even if your state has laws to cap fees, there’s still a good chance you’ll find yourself paying the equivalent of an APR of 100 percent or more.
Some people swear by the benefits of payday loans, while others avoid this financial product at all costs.
There is no right or wrong answer as to whether a payday loan is a good decision. You should make up your own mind based on the information you collect and your current financial situation.