Why Consider a Payday Loan?

Although payday loans have come in for considerable criticism and debate over the years, there is no denying that payday loans are an essential means for people to acquire cash in a hurry. A payday loan is a short term loan (usually for a duration of a couple of weeks), and a payday loan allows people to borrow cash till the next pay check. People all over the US have started availing payday loans, and payday loans make up nearly $28 billion in transactions in the US alone.

There has been considerable criticism of payday loans, and many people believe that payday loans are a form of ‘predatory’ lending. There is no denying that individuals that avail payday loans are hard pressed for cash and are willing to agree to almost any APR (Annual Percentage Rate), but payday loans are also helping people with poor credit rating and no collateral make ends meet. Another factor that has gone against payday loans is that they are only designed for a short period of time, and equating them as APR is not a fair extrapolation.

To understand how the APR extrapolation mentioned above is unfair, let’s take an example. A $500 payday loan usually translates into a returnable amount of $650 after a period of two weeks. This would mean the interest rate when extrapolated annually will result in an effective APR of nearly 700%! Interestingly, both the lender and loan taker know exactly how long the loan is going to last and an APR of 700% is nothing more than a mere statistic. In addition, most payday loans are restricted to a principle amount of $500.

Unfortunately, banks and other financial organizations are not interested in offering customers a loan for an amount as small as $500, and payday loans are a vital bridge between small loans and casual loans (loans taken from friends and family). In addition, not everyone has suitable credit history to approach a bank or credit card company. Although credit cards are also a great way to make ends meet before the next pay check, most people availing payday loans do not hold (or are not eligible for) credit cards.

Another factor in favour of payday loans is that a loan taker does not have to offer any collateral or security to avail a payday loan. Unlike banks and financial organizations, a payday loan does not require the loan taker to submit detailed documents (a recent payslip is enough). As mentioned earlier, financial institutions will make sure they run a credit check before offering any loan, but even people with poor credit history can avail a payday loan.

In conclusion, there is no denying that there have been certain restrictions on payday loans by the US government, but payday loans are still a source of financial aid for many Americans. In addition, payday loans are by no means unfair and the interest rates are not as bad as they are made out to be by critics.