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.