Payday Loans: Are they a Recommended Type of Loan

Most financial experts don’t recommend using payday loans. But most people who apply for payday loans cannot afford not to have the cash quickly. And while payday loans aren’t a great solution, they can be a convenient temporary solution.
The drawbacks to payday loans are many. They have exorbinately high interest rates. And they usually come with fees and surcharges that don’t usually accompany traditional loans. And perhaps worst of all, in many cases those who apply for payday loans don’t realize how high the interest rates or fees really are.

One reason borrowers don’t understand how the fees and interest rates impact their loan is because the amount being borrowed is usually less than $1000 and the date in which the loan is due is usually only two weeks from the date the transaction started.

How Exactly Does a Payday Loan Work?

Basically, payday loans are short-term loans given to people receiving regular paychecks.

When applying at a physical payday lender location, the borrower needs to issue a post-dated check to the payday loan company. The amount on this check includes the amount of the loan, interest and all the applicable charges. This check is post-dated for the day in which the recipient is next paid.

For online applications, the borrower fills out a brief form which is then submitted and validated by the online lender. A short time later the borrower is notified, usually via email, that the loan application has either been approved or rejected.
Not all payday lenders approve transactions at the same. Most storefront lenders can give cash immediately. Online lender, though more convenient, take more time – sometimes as much as 24 hours. But online lenders can deposit the funds into your bank via a direct deposit transaction.


Be Aware of the Payday Loan Alternatives

• Visit the local credit union in your area. The short-term loans that they offer usually have a lower interest rate and more borrower-friendly terms and conditions.
• If you are taking out a loan to pay off pending bills, considering having a payment arrangement or request for an extension.
• If you are taking out a payday loan in order to pay off another credit card debt – think twice before doing so. There are credit consolidation services which should be able to assist you in handling you credit card debts.

All in all, payday loans are a suitable alternative if you know exactly what you are getting into. Understand that this type of short-term loan has a higher interest rate as compared to loans from other financial institutions.

Finally, remember to not fall into the debt trap of extending the payday loan that you have applied for – since this will just increase the interest that you have to pay.

<< previous | Next >>