In the midst of a financial crisis a payday loan can help cover an emergency and/or necessary expenses. They offer numerous benefits:
- Payday loans are easy to apply and qualify for: The majority of lenders have simple approval policies with few limitations.
- Payday lenders safeguard borrower’s personal information: Lenders are diligent with their record maintenance and security and do not give or sell borrowers personal and financial information to other companies.
- Payday loans are quick: The application and approval process only take a few minutes. A lot of lenders offer a one-hour guarantee once a borrower is approved.
- Payday loans are flexible: They are typically short-term so that borrowers can repay them quickly and easily.
- Payday lenders limit loan amounts: The amount of money that a borrower is approved for is often directly related to borrowers’ earnings. Typically lenders will base the amount of money loaned on a percentage of the borrowers’ income in an attempt to make it easier for the borrower to repay the loan.
- Payday lenders are governed by legislation in most states: Many states have laws in place that prevent lenders from charging excessive fees and interest rates in order to protect borrowers from price gouging.
- Payday loans are typically unsecured and don’t require collateral: Payday lenders typically don’t require an explanation of what the loaned money is going to be used for and generally don’t place restrictions on the use of the loaned money.
- Payday loans are convenient: Payday lenders often have different business hours than traditional lenders and are open outside of traditional lending hours allowing borrowers access to emergency cash both in person and online.
- Payday loans are invaluable in times of financial emergencies: Payday loans are often available to the borrower in less than an hour after the approval of the loan so there is limited waiting on needed funds.
- Payday lenders are limited as to the amount of interest they can charge: Most states place a cap on fees, the amount of interest, and other charges lenders can charge for a payday loan.
Regardless of the topic or issue everything has advantages and disadvantages. Sometimes the advantages outweigh the disadvantages and other times disadvantages outweigh the advantages. Fortunately, with payday loans the advantages outweigh the disadvantages.
Disadvantages to Payday Loans:
- Payday loans are for short term needs only. Borrowers who need larger amounts of money for longer periods of time will not benefit from a payday loan.
- Payday loans involve fees and interest payments. The charges associated with a payday loan are a bit higher than traditional bank loans. Inability to repay a payday loan by the maturity date can result in charges and fees that are doubled.
- Payday lenders require a borrower to be employed full time. Potential borrowers who are only working part time, receiving unemployment benefits, or receiving welfare will more than likely be ineligible for this type of loan.
- Payday lenders require borrowers to have a current bank account. Potential borrowers that deal with cash only will be determined to be ineligible for this type of loan.
- Payday loans are for relatively small amounts. Most payday loans are approved for $1000 or less. Potential borrowers in need of larger amounts of money will be required to seek other alternatives.
- Possible fraudulent online lenders. Potential borrowers contemplating applying for an online payday loan should research the company they are planning on borrowing from to make sure that the lender is reputable and trustworthy. There are dishonest lenders that sell borrowers information.
Adair Morse, an assistant professor of finance at the University of Chicago, conducted the study “Payday Lenders: Heroes or Villains?” which determined that payday lenders benefit communities struck by natural disasters. Morse study assessed the impact that payday lenders had on communities affected by a natural disaster by looking at four areas of community welfare: birth rates; death rates; drug and alcohol treatment rates; and foreclosure rates.
Morse study revealed that the presence of payday lenders in the disaster-stricken communities increased welfare in all four areas more so than traditional financial institutions. Although the traditional financial institutions did somewhat benefit the disaster-stricken communities they were not able to provide the same level of services that payday lenders did. Morse has indicated that this same principal can be related to people who are in a financial crisis.
Living paycheck to paycheck is nothing new to millions of middle-income Americans who juggle whatever they have to in order to meet their financial obligations. However, when unexpected expenses come up their budgets are thrown off and the need for financial assistance becomes inevitable.
Although some will turn to friends and family to get them through the crisis others will not have the available support system in order to do so and will require outside assistance or face having their electricity disconnected, their vehicle repossessed, their home foreclosed on or being evicted if they rent. To those who have a limited support system payday lenders offer something they can’t get anywhere else, a friendly face and solace in the eye of the storm.
Payday loans aren’t always the perfect answer to a financial crisis but at least they are an option for those who have limited options. There are borrowers and lenders alike who abuse this option but at the same time there are borrowers and lenders who do not.
It would be incorrect to group all payday lenders in a single group and all payday borrowers in a single group. As with all walks of life there are just as many honest lenders and borrowers as there are dishonest borrowers and lenders. To say that all lenders are dishonest and take advantage of their borrowers would be as much a misrepresentation as saying that all borrowers default on their debts and therefore can’t access traditional forms of credit.