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Quick Payday Loans - Pluses & Minuses

The Negative Side

In general, both the CFA and the FTC are very skeptical of what they call “predator lenders” and “legal loan sharking.” Their argument is that payday loans are too expensive and far too easy to come by. They are concerned for the millions of Americans who face a sad life in great debt.

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Studies also show many people have trouble repaying their loans. A great number of payday loan customers extend their loans for weeks and months, creating an even worse financial situation.

Another downside involves the costs of these loans – they are extremely expensive and few who take them realize just how expensive they can be. Instead of using an Annual Percentage Rate, many payday lenders only operate with the term “finance fee.” According to the Truth in Lending Act, a lender has to specify the level of the ANNUAL PERCENTAGE RATE (APR) of a loan. Far too many payday lenders avoid this and just inform about the fee, without “translating” it into the equivalent ANNUAL PERCENTAGE RATE (APR). There are, however, many lenders that do abide by this law; a customer would be wise to choose a lender honest enough to put all their cards on the table.

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Many people might think that a payday loan with a fee of $20 per $100 is the same as a 20% ANNUAL PERCENTAGE RATE (APR). Credit cards often charge as much as 17-20 % ANNUAL PERCENTAGE RATE (APR), so a payday loan seems to cost about the same. This is not the case. Loans at a 20% ANNUAL PERCENTAGE RATE (APR) charge 20% over an entire year, while a payday loan with a $20 fee per $100 loan charges $20 every two weeks. Actually, this is 26 times more expensive than a loan or credit charge at a 20% ANNUAL PERCENTAGE RATE (APR). When translated into an ANNUAL PERCENTAGE RATE (APR), payday loans are equivalent to an ANNUAL PERCENTAGE RATE (APR) anywhere between 250-650%. This is the financial downside of payday loans – and is especially difficult for those trapped in debt and having trouble repaying their loans.

The Positive Side

With all this negative information, why would anyone ever consider taking such a loan?

Most payday lenders stress the fact that the loans they offer are not intended as long-term solutions. They are short-term, emergency solutions. A payday loan is not intended to be renewed into infinity.

Furthermore, very few lenders offer as much as $2,500 in loans and most will never exceed $1,000 in one loan. The average loans are somewhere in the range of $200 to $500, which are amounts that can be overcome relatively easily. If the consumer understands the basics of this and uses payday loans correctly, he or she need not fall into a debt trap.

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For certain consumers, payday loans come as a blessing. Anyone who has a bad credit rating, even after the credit problems no longer exist, will find it difficult to obtain a small bank loan or a credit card. If not for payday lenders, many consumers would have no place to turn when temporarily in need of extra cash.

If your only other option is bouncing a check while waiting for payday, a payday loan will undoubtedly be a far better solution. Banks take a penalty fee of $20 - $30 for each bounced check. Also, that bad check can lead to future trouble with its recipient and prevent later purchases. Bounced checks will also leave a negative mark on the relationship with your bank and might lead to a bad credit rating. Getting a payday loan will help you avoid such negative consequences, as well as being less expensive than bank penalty fees.

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Although a more expensive alternative than other types of loans, if used only as intended, payday loans can be utilized as a beneficial option for a large number of consumers.

* Payday Today is not a payday lender or broker. We provide research and information about payday lenders and products, and are not necessarily affiliated with the companies featured on this site. Availability of products and services varies by state. Not all independent lenders will approve you for a loan or can provide you with up to $1,000 on your first loan.

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