Keep the Checks Comin’: The Pros and Cons of Payday Loans
One of the easiest ways to get money in a pinch is a payday loan. These loans are short-term and often due by the borrower’s next paycheck.
Living paycheck to paycheck is a common occurrence for Americans. As many as 8 of every 10 Americans struggle to make ends meet.
However, living paycheck to paycheck can be a real pain if something comes up.
You may find yourself in desperate need of a quick cash injection. Before you take out a payday loan, consider the pros and cons of payday loans. Continue reading below to find out more about this quick cash option.
How Payday Loans Work
Payday loans are small-dollar options for those who need money before their next paycheck. These loans often come with short terms, about two weeks.
These loans act like cash advances against your next paycheck. Basically, you sign over your next paycheck in order to obtain the dollar amount. If you take out a payday loan, you’ll need to pay back the amount of the loan plus interest.
Experts have traditionally viewed payday loans as predatory schemes. For this reason, the Consumer Financial Protection Bureau (CFPB) has enacted new protections for borrowers.
Before you sign a contract for any loan, you should read the conditions and make sure you understand them. Be sure to learn more about how payday loans work and the risks involved. The pros and cons are as follows:
Pros and Cons of Payday Loans
Any lending option will come with its share of pros and cons. Beware of your options before you make a decision.
The Pros of Payday Loans
Payday loans offer an emergency borrowing option for those who have an unexpected expense but bad credit. Having bad credit can seriously impact your ability to get loans or credit cards.
Many payday loan lenders won’t ask you for a full credit report, though they may perform a soft credit inquiry. This has two benefits. The requirements are more liberal, and there will be no impact to your credit.
Once you gain approval for a payday loan, you can receive funds in as little as an hour. This is the fast cash you needed!
Many payday lenders are online, making the application process much easier. You don’t have to wait for a bank to open or spend all day speaking to a loan advisor. You can access the lender’s site at all times of the day.
Once you complete the application online, you’ll get an immediate response.
This is a great option if you find yourself needing cash immediately.
The Cons of Payday Loans
New regulations exist to protect borrowers from dangerous debt cycles. This has traditionally been the biggest downfall of payday loans. Many experts hold these loans to be predatory in nature.
It can be difficult for borrowers to repay the loan by the end of the terms.
Most lending options come with installment plans, meaning you’ll make several payments over time. You’ll most often need to repay a payday loan all at once.
Payday loans often come with high interest rates. Credit cards typically have high rates, around 20% APR.
When calculated as an APR, the interest rates on payday loans can be as high as 300% APR.
The concern comes in that borrowers already have a difficult time making ends meet. That’s the typical situation of payday loan borrowers.
Adding high interest rates and fees to the principal loan amount can make the loans near impossible to repay. Some borrowers will seek further loans to repay interest and fees.
New Regulations on Payday Loans
To mitigate the risk to borrowers, the CFPB has enacted new regulations. These new regulations go into effect this year.
Each lender must make sure the borrower can repay the loan. The lender must use what’s called the full repayment test. The borrower needs to be able to repay the loan in full by the end of the loan terms.
The lender should not lend any money that cannot be repaid.
Before the new regulations, the lender could make several attempts to withdraw the loan amount from the borrower’s bank account. New regulations limit these attempt to only two times.
This new rule limits overdraft fees on the consumer’s account. Overdraft fees could compound the already-struggling borrower’s debts.
The new rules also limit the number of times the lender can rollover the loan.
These new regulations enacted by the CFPB ensure borrowers can pay back loans. This keeps them out of dangerous debt cycles that could damage their financial future.
Cons of the New Rules
Not everyone agrees these new regulations are a good thing. Some people believe these new rules extend beyond the authority of the CFPB. As a result, the agency could see new and expensive lawsuits.
As a result of the new regulations, some fear traditional banks and credit unions may be unable to enter the market. If banks were able to enter the market, they could offer loans with easier terms.
In some areas, payday loans thrive and offer many jobs. In these areas, new regulations could put payday lenders out of business. This could create what some call “credit deserts”.
Should You get a Payday Loan?
Payday loans can be a great option for those who need quick cash. However, high interest rates and short terms could make the loans difficult to pay back.
New regulations are set to go into effect this year, so you may have an easier time. Before you take out a payday loan, make sure you understand the terms and conditions.
Don’t get fooled into a vicious debt cycle. This could set you up for financial failure in the future. Consider the pros and cons of payday loans.
If you find your money difficult to handle, check out this article on financial planning.