Payday loans are short-term,
unsecured loans, lend to borrowers to manage their cash flows
between paydays. They are also known as payday advance loans
or cash advances. The loan is usually provided in cash and secured
by a post-dated check (coinciding with the borrowers payday)
for the principal amount along with the interest for the loan
period. Borrowers who avail this loan generally have cash flow
difficulties with no other alternatives for low-cost borrowing.
The post-dated check that secures the loan is processed by the
lender for clearance, if the borrower fails to repay or service
the loan in person.
Payday loans are criticized by many for exploiting the young and the poor living in low-income communities. The high interest rates associated with the payday loans (250% or more in many cases, when annualized) is a disadvantage to the poor people, who usually avail this loan, compared to other classes of people who pay only 25% or less for similar loans on their credit cards. It is also considered as an unregulated business and in fact many states in U.S have banned payday lending due to factors like exploitation, lawlessness, and higher interest rates etc., which are usually associated with this business.
In spite of many negatives, the payday loan industry is growing phenomenally in countries like United States, because they remain as a fast and convenient way for the consumers to borrow cash to meet their immediate needs. However, borrowers can land up in trouble if they fail to repay the loan on time or borrow more than their repayment capacity. Here are a few tips for the borrowers of Payday loans, which may help to lower the cost of borrowing,
• Never borrow more than the actual need payday lenders may instantly
sanction or approve more loan amounts for a fixed fee, but the
interest for such loans would be much higher. So save yourself
a few bucks by only borrowing what you need and nothing more.
• Lower loan amounts are easy to repay and can save you interest. So avoid borrowing excessive amounts.
• Compare the loan fees and interest before borrowing different lenders
charge different fees and interest for Payday loans. Select
the lenders who offer lowest fees and interest, to keep your
repayment costs low. Online services can help borrowers to compare
the interest rates and fees of loans, easily.
• Repay your loans as early as possible the sooner you
repay your Payday loans
the more you would
save on the interest. Failing to repay the loans on time will
only add up to the interest burden on the borrowers.
• Ensure that there is enough money in your bank account to honor the checks you issued to the payday lenders. If your checks cannot be processed due to lack of funds, then the payday lender may charge you an additional or late fee. Moreover, your bank too could charge a penal fee for lack of funds.
Even though payday loan is the easiest way to get some quick cash to manage emergencies, it has many disadvantages like very high interest rates, high processing fees etc. Hence, it is advisable to check other alternatives available, before approaching a payday lender. Here are few alternatives to Payday loans,
• Salary advance request your employer for a salary advance in case
of an emergency, before approaching a payday lender. It is the
easiest way to manage cash flows between paydays.
• Apply for a loan in your local bank. The bank may take a few days to process your loan, but the interest for the loan would be much lesser than the ones charged for payday loans.
• Withdraw cash using your credit card and repay it on or before the
next pay day. Many banks do not charge any interest for a period
of 30 : 45 days for such loans.
Always keep Payday loans as the last option, unless and until they offer you a clear advantage in managing your financial problems. You could opt for payday loan when,
• If the late fees on the payments you are required to make are much higher than the fee for a payday loan.
• When late payments could affect your credit, which is essential
for taking other loans in future, you can opt for a payday loan
to manage the crisis, since the additional cost incurred is
only a temporary one and it can protect your credit.
• If the funds in your bank accounts are insufficient to honor your checks issued to a third party. Bounced checks affect your credibility and attract more fees than the ones charged by payday lenders for cash advances.
• If the long-term consequences for not addressing your immediate financial need is more serious than a $50 fee charged for payday advance.
Opting for a payday loan, when a borrower do not have the ability to repay
it in a short-period, could lead to more trouble, doubling the
financial burden instead of easing it out.
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