Friday, November 22, 2013


Paydayloans are indeed “a friend in need” to an individual. When a person needs money (modest amount) for a short time period (2-3 weeks in general), he can just borrow money from a lender in lieu of a signed check where he mentions the amount he is borrowing plus a fee charged by the lender. Now the borrower can extend the time period later or pay the amount on the due date. Failing so, the lender can cash the check.

So the idea is very simple; however there are risks involved in this process and if you don’t know them beforehand you might get entrapped in it. Like any other process related to finance, payday loans has got its own pros and cons. The following is a list of those risks which one should consider before taking Payday Loans:

1) Watch out the Interest Rate:

The interest rate is undoubtedly high when the discussion comes about Payday Loans. They are considered extremely expensive. The Consumer Federation of America has a nice calculation which shows that you might need to pay 426% interest rate or 1000% interest rate in cases as well. Sometimes the lenders promise a low interest rate but that is to lure a needy person. While one goes there and searches for a higher amount of debt, he might see they apply different interest rate for that.

2) Your Credit Score is reviewed, Mind it:

Some borrowers think that even if somehow they become unable to pay the loans, their credit score is not going to suffer. However quite opposite to this popular belief, ones credit score in fact suffers and when somebody finds out a person hasn’t paid his previous loans, they become disinterested in giving loans to that person.
Now the question may arise if the agencies who give credits don’t inform the credit bureaus, how can one’s credit score suffer? Actually they don’t inform unless you pay on time, but once you made delay they don’t hesitate to inform the credit bureaus and that makes your credit score dropped.

3) Don’t get habituated with Payday Loans:

One of the most harmful effects of taking payday loans in often it makes one dependant on them too much. Payday loan is good in extreme and emergency situations like sudden medical needs or a quick visit to the mechanic for repair of one’s car. So once or twice in life, payday loans are good. But if one takes too much loans often, he can get habituated with taking it. As the interest rate is high, suddenly one can find that he is unable to pay the debt in time and he takes another loan and this way his overall expense increases. This may lead one to complete bankruptcy.

4) Beware of Fraudulent Lenders:

Now-a-days American Govt. visibly the Justice Department and State Regulators are trying to comb out fraudulent lenders in the payday loan industry. These lenders can be online lending companies. They often operate from offshore or on Indian reservation which fall outside the regulators. These bad actors are acting constantly in the market to fill their pockets dishonestly in the market by duping the common people. Although the Govt. is trying, one should be conscious as well before taking loan from a company.

Now taking all these into accounts, one might conclude that everything about Payday Loan is bad, but in fact it isn’t. There are advantages too, like quick approval, overdraft protection program and it is less expensive than bounced check fees.
So Payday Loan is not bad, if you know the risks.