The Basics About Payday Loans

A payday loan is a short-term loan, consisting of a small amount of money to cover your urgent expenses till you get paid again. Payday loans usually carry high interests rates when calculated on annual basis although most payday loans are given with the assumption that the borrower will pay it back when he receives his next paycheck, hence the name - Payday Loan.

Most loans are on a two week term. The interest rate makes the process very expensive for the borrower, and to add to that, if on the day that the loan amount is due to the bank and the borrower’s account does not have enough cash, the check bounces. This bounced check adds to the borrower’s pains, and other outcomes may include extra fees or a larger interest rate because the loan is not repaid. This might lead to a debt cycle which is hard to break out of. In fact, statistics show that only one percent of these loans go to people who borrow once a year, and clear the debt in time without incurring any additional costs due to non – payment of cash. Thus a lot of people blame pay day loans for worsening the financial problems of borrowers who already have major money issues. The interest rates are unfairly large, they say, as compared to those that are charged for credit cards which are used by middle and upper class people. Lower income people may be ignorant about the debt trap that pay day loans can land them in, and have to keep borrowing and paying astronomical rates of interest in order to finally release them from the cycle.

However, others argue that payday loans are the only alternatives for people who cannot avail of alternatives such as loans from friends and/or family and credit cards. They also argue that just like home mortgages, their lower principal, short term counterparts – payday loans – have high rates of interest which are justified. They claim that having lower interest rates on payday loans would not fetch much profit and would not even match the processing costs. However, critics point out that payday loans don’t have very high processing costs and thus the supporter’s argument is not valid. Other options to payday loans are available and include small loans for consumers, money borrowed from close friends or family members, advance payments by employers, advances on credit cards and credit unions. Payday loans have as many proponents as they have critics, and many lower and lower-middle income people do continue borrowing these loans, especially when they have no alternatives.