Payday lenders are lenders who specialize in small loans with fast repayment terms. Payday loans often have high-interest rates, and borrowers must be aware of the associated collections practices if they cannot meet the repayment terms. Depending on where you live, you could have laws in your state limiting payday lenders to extending loans of no more than $500, though some states have higher limits and others have lower lending limits. When considering payday loans, borrowers must be aware that some lenders may not thoroughly assess the borrower's ability to repay the loan.
What are Payday Loans?
Payday loans are small loans that must be repaid in a single repayment, usually on the borrower's next payday. Payday lenders will either require borrowers to submit a post-dated check at the time of the loan or to agree to an electronic debit directly from the account on the agreed-upon date (usually within two to four weeks of the loan date). Payday loans are generally approved within minutes, and you can receive the funds almost immediately via direct deposit into your account, cash, or a prepaid debit card.
In other words, payday loans offer the promise of fast access to cash in emergency situations. However, the ease of approval and immediate access to emergency funds come at a high price and considerable risks to stretched-thin borrowers.
Pros and Cons of Payday Loans
For people who need money now, payday loans offer fast access to cash; with many payday lenders offering approval and funding within minutes of the application, it's hard to beat the convenience of payday loans. However, the stiff fees and heavy-handed collection practices can make them difficult to repay, especially those strapped for cash and facing financial hardships.
Another benefit of payday loans that is a one-half benefit and one-half cautionary tale is that lenders do not have strict credit requirements before approving these loans, nor do they investigate a borrower's reasonable ability to repay the loan. In fact, some lenders will allow borrowers to push the repayment terms back week after week as long as they continue paying stiff fees and high-interest rates for the privilege.
Some states have stepped in and passed laws maximizing loan fees for these loans, though the APR (annual percentage rate) for these loans is staggering when considering the rapid repayment periods. The most significant consideration for payday loans is the final cost to borrowers, and not all expenses are involved in fees, interest rates, and the rapid repayment cycle.
At the end of the day, it is the responsibility of borrowers to understand the terms and conditions of any loan under consideration. Being well-informed will help you make the best decisions for your financial needs.
How Payday Lenders Operate
Payday lenders require either post-dated checks for the total loan amount as repayment or the ability to electronically debit checking accounts on the borrower's next pay date. The problem for many borrowers is that the entire loan (loan amount plus interest and fees) is repaid in a single lump sum payment that can be cost-prohibitive and painful.
Regulations on Payday Lenders
Because of the heavy-handed lending and collections practices of some bad actors within the payday loan community, many states are enacting laws designed to protect consumers from these practices that result in what equates to a modern version of indentured servitude for many borrowers.
Alternatives to Payday Loans
Fortunately, there are alternatives to payday loans to consider. Believe it or not, credit cards offer preferable interest rates and fees to payday loans and more attractive repayment terms for borrowers. However, using these with great caution is essential as it is easy to overextend yourself with credit cards.
Another alternative is a 401(k) loan. This allows you a short-term, low-interest loan that will cost much less than a payday loan.
Finally, consider personal loans or PALs (payday alternative loans). PALs offer up to 12 months to repay at interest rates comparable to credit cards. They are fixed-amount loans and offer much more reasonable fees than the average payday loan. If you have a solid credit history, personal loans are available as secured or unsecured loans and can be a much better solution for your cash flow needs.
The bottom line is that payday loans are designed to favor the lender and never the borrower. If you can avail yourself of one of these alternatives, it is in your best interest to do that.