What are Payday Loans and How are they different from Conventional Loans?

Payday loans (also called cash loans) were traditionally given out when people got their wages. The employees were allowed to borrow loans from the company which they were obliged to return before the next payday.

These loans were far easier to avail than than conventional loans at banks. Bank loans required collateral and took a long time in getting approved. Modern day payday loans are similar in that they are easy to procure and helps you gain access to quick cash during emergencies.

Bank and credit institutions still take a long time to approve loans and the procedure is much more complex and long-drawn. Payday loans can be useful provided you use them wisely. Loans (payday or other loans) should only be acquainted after you have examined your finances and made sure you can afford the rates of interest. It's also important to understand the time frame of repayment and the penalties involved upon non-repayment of the loan.

To summarize, there are some important questions that you need to ask yourself before procuring payday loans:

  • Do you really need one? Can you manage without taking out a loan?
  • What are the rates of interest charged by the provider?
  • Can you afford to pay back the loan? Have you calculated exactly how much you will need to repay?
  • What is the repayment period? Can you manage to repay the loan within that period?
  • In the event that you are unable to repay the loan, what are the penalties involved?

Escalating Money-troubles

In these days of rising expenses and an unfriendly economy to boot, it comes as no surprise that people are often in a hole for money. With staggering inflation rates pushing up prices of commodities; the business of daily life is getting more and more difficult to deal with.

With hundreds of payday loan providers advertising their fast approvals of payday loans on the internet, it's no wonder that stressed clients find it appealing to simply apply for a payday loan online. There are certain distinct advantages to this mode of borrowing.

Benefits

  • They are easy to obtain. Approval time is usually within hours.
  • They are great for borrowing urgent cash on week-ends, nights and public holidays.
  • Documentation required is only your ID (applicants are required to be above 18 years old), bank statements and proof of employment. So no complicated faxing and copying to deal with.
  • Due to the online flexibility, applicants are able to apply from the comfort and privacy of their homes and in their own time.
  • A bad credit background does not hamper your chances of approval of a payday loan. They are only interested in your current employment details.

Those are the advantages. They work well especially for people who:

  1. Have steady employment and a decent income
  2. Have the confidence and resources to pay the loan back in the stipulated time-period.

There are however several pitfalls that consumers must watch out for:

  • They have a very quick (and there's stressful) reimbursement schedule- usually within one month.
  • They are associated with unusually high interest rates often pegged at 400 percent up to 700 percent
  • There is a lot of fine print embedded in contracts cleverly understood in legally incomprehensible phrases.

The applicant may feel relieved that he has managed to stave off a financial crunch but little does he realize that with his next salary; he has to pay off his loan and pay other regular bills (rent, utilities, school fees) as well. This leads to a bottleneck situation at the end of the month.

Such stress for repayment invariably leads to the harassed applicant applying for yet another payday loan to pay off the previous one! This snowball effect leads to a spiral of financial disaster that typically requires professional intervention at some point.

But for people who have a reasonably decent cash flow coming in, repayment should not pose a problem. The best thing is to sit down with a pencil and paper and write what you owe and when you can afford to repay the loan. Have you done the math for the current rate on your payday loan?

Conclusion

They serve the purpose when you have a temporary setback- as a one-time deal. They are suitable for people who have a healthy income at the end of the month to look forward to. Analyze your cash problem. Is it really URGENT? Or can you manage with your savings to span the period until your next pay-check? If you find that you can manage, do not apply for one!

Payday loans are not that great for individuals who already have mounting loans and no way to pay them off. Applying for a loan to pay off another one is a sure-shot way of getting into an endless cycle of debt.



Source by Nirupama N Raghavan

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