Pay day loans have quickly amassed a negative perception in the personal finance community. Many will argue there is absolutely no reason why one must resort to pay day loans.
I beg to differ. Emergencies do occur. Life does happen sometimes to where a pay day loan becomes one of the only options left.
With that said, the risk is that one may prematurely feel they have no more options left, or get in the habit of tapping into this source of funding after having realized the ease with which it works.
Interestingly enough we live in a democratic society where we vote with our wallets. We let our dollars determine whether businesses survive, thrive or outright fold.
Payday loans have enjoyed a tremendous growth spurt. Take any publicly traded payday loan company and look at its stock chart. The concept has been well received by many.
I will refrain from going into a pro and con analysis of payday loans in this article. It is obvious that people are using these services. What I want to do is list out what I feel are a few things that must strongly be considered when evaluating these loans.
it is important to realize the true cost of the loan. These loan transactions may involve a “small fee” upfront, but when extrapolated this fee amounts to an interest rate of 300-900%, compared to a 25% APR on unsecured credit card debt for example. The small gross dollars involved don’t always tell the full story.
There are other intangibles as well to be mindful of, such as traveling to a location where these are located. Payday loan shops are generally not in the safest areas of them all.
There is some level of inherent stress and risk level involved when traveling to one. It is important to realize the safety implications involved with visiting Payday loan shops.
Payday loan transactions are quick to execute. When you see well lit door signs that read “Payday loans 1 hour funding” guarantees, don’t be alarmed as these are accurate. It
is very easy to apply and get approved for a Payday loan. Funds are also deposited quickly into your account. The most stringent requirement is likely your age. You must be 18 to apply.
This concept just lends itself to abuse, and as you can imagine people use payday loan funding in all sorts of ways. One of the more prudent uses I have seen is when folks use the funding to “plug the gap” by gaining short term access to cash to prevent other larger and more long term negative repercussions such as delinquency and credit score implications.
For example, when a credit card bill is due and in its last stages of collection, to avoid being charged off and written off and therefore impacting credit negatively, one may decide to opt for a Payday loan (hoping that no other viable avenue is left) to make the payment, again assuming that the Payday loan is repaid quickly.
In such an instant, the high transaction cost involved may be justified. As you can imagine, this can become dangerous as it can develop into a habit. People just get carried away. The ease of the process is designed to trigger that effect.
The entire concept of Payday loans supports a debt ridden society like the one we live in. It supports (and in many cases encourages) consumer debt levels, which is a growing epidemic not only in the USA but in emerging markets as well as more and more are rising from poverty and want a taste of the good life.
My two cents on pay day loans is that they should be considered only in life threatening-like emergencies. Without such drastic circumstances, I cannot justify the need for it.
If you find yourself considering this funding option, the sooner you repay it off the better. Because of uber- high interest rates involved, timely repayment of payday loans is key. You will otherwise find your loan balance balloon bigger than Everest before you even know it.
Note: For European readers, payday loans are also often referred to as a cash loan in the United Kingdom.