There are several types of loans that are available in the market ranging from short term to long term. One such very short term loan is a Payday loan. Payday loans are small and unsecured short term cash that is borrowed by people for an urgent need. It is an instant cash loan that is provided to the people immediately. The term “payday” in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary but receives part of that payday sum in immediate cash from the lender. People opt for a payday loan to get through the month until their next salary kicks in. Payday loans are mainly borrowed by the working class who have difficulty in making ends meet, and are often broke at the end of the month.
A payday loan is a small principal amount that is lent out, often at a very high-interest rate, it mostly varies in the range of 30-50%. Payday loans need to be repaid within a short period. It depends on the loan provider how much time he grants for the repayment of the loan, it can be within 7 to 60 days. Considering all the factors of being a loan with short tenure repayment, urgent nature, and repayment risk makes the loan very costly. Irrespective of this fact, people still are willing to take it just because of the convenience it offers in the case of an emergency. These instant cash loans are mostly taken by people for life events such as loans for weddings, medical emergencies, cash bookings of a plot, payment of school fees, etc.
Advantages of Payday Loans
Payday loans are best for the working-class people who live month to month and find it difficult to cater to sudden expenses. In an emergency, it can prove to be a saviour for them. Here are some of the advantages of a payday loan:
- Quick and Easy
A payday loan is one of the best and fastest instant cash loans that are provided to the borrower. It doesn’t take much of your time and the loan is credited within minutes. It gets approved and disbursed without much hassle of lengthy waits and unwanted stress.
- Minimum Documentation and Formalities
If you opt for a payday loan then you don’t have to worry about filling a pile of forms and doing all the paperwork and formalities. It is a simple and smooth process that hardly takes any time. Also, you don’t have to carry a huge folder of all the documents that are required for other conventional loans as payday loans do not require any extensive documentation. In most cases, the main requirement is to have a bank account and share some minimum personal and financial details.
- No Credit Check
The best part about payday loans is there no credit check prior to availing of the loan. There is no involvement of credit checks or collaterals in the process. Sometimes, people with bad credit scores are debarred from a loan but it is not in the case of payday loans. Anyone can avail of this loan irrespective of financial background.
Disadvantages of Payday Loans
There is a saying, “All that glitters is not gold”. This accurately fits in the scenario of payday loans. The very reason that makes the payday loans attractive can suck the borrower into a vicious cycle of debt.
- Very High-Interest Rate
Payday Loans charge a very high-interest rate than any other loan. The interest per day seems to be manageable but when it is annualized, it turns out to be 400% annual interest (APR) or even more. In some cases of very short loans, the APR can even go up to 9000%. Just think on average credit cards have an APR of 9-30%, now you can imagine how costly payday loans can be.
- Debt Trap
The major disadvantage of a payday loan is that it can drag you into a vicious cycle of a debt trap. If you are unable to repay the loan amount within the said period, it will cause you to pay huge penalties and additional costs. It often makes it impossible to repay going ahead, making the probability of a debt trap very real.
How can you get a payday loan?
Getting a Payday loan is very easy and convenient. You don’t need to worry much about this process. According to the government’s Consumer Financial Protection Bureau (CFPB), a lender needs to only recognize some basic points about the borrower, that are:
- Firstly, the borrower should not be less than the age of 18 years.
- Secondly, he/she should have an active checking account.
- Lastly, he/she should provide some proof of income as well as valid identification.
By providing all the above credentials, the borrower can get a loan in as few as 15 minutes. Mostly, the borrower writes a check for the loan amount plus a lending fee that the lender holds until a predetermined due date. When the loan comes due, the borrower either pays off the loan or allows the lender to cash the post-dated check or otherwise make a withdrawal from the borrower’s account.