What are Payday Loans?
What happens when you get in a bind and can’t get any access to cash for some necessity? Sometimes it may make sense to borrow money or sell an item to pay for the expense, but that’s not always an option. In fact, there can be many critical events that require immediate cash that can’t be paid for otherwise – such as medical bills or a car repair. But it can be difficult to get what you need. That’s where a payday loan for bad credit may come in handy. Be extremely careful, however, because payday loans, also known as pay advance loans, have risks.
A payday loan a type of loan that is approved quickly and without a credit check because it uses collateral to secure the loan – that collateral being your paycheck. Because the only requirement for approval is one’s income, they can be popular especially among the subset of people with poor credit scores. In a bind, these loan options can help provide instant cash for people in desperate need of liquid money to make payments on something.
As previously stated, though, there are negative aspects to these types of loans – most noticeably their high interest rates. Because these loans are not checked against credit scores, there is no structure to the fees or interest rates, and the lender takes on a large amount of risk by approving the loan.
Every time a loan is approved, the lender risks their own money (or their company’s money) on the individual in question, assuming they will pay it back. That individual’s credit score determines their level of risk. By approving a loan without evaluating how responsible and credit worthy the applicant is, the lender inherently assumes more risk than if they were to verify this information. As such, to offset the possible losses of an individual failing to repay the loan, they have to charge higher interest rates and fees.
When a loan has high interest rates and fees, the debtor ends up paying substantially more money in the long run, even over a short period of a few weeks or months. Because of this, payday loans will typically only be approved for small sums substantially smaller than the size of your upcoming paycheck. In order to guarantee the lender will recoup their investment and the associated fees, the lender will give you a much smaller payout, meaning you lose a large chunk of your paycheck in the process.
Worse still, if you fail to pay in the allotted amount of time, the loan will typically go to collections and will begin to impact your credit score negatively.
Payday loans are useful, but should only be considered in the event of extreme necessity. The risk is significantly higher than the reward, and any savvy financial adviser will counsel you to have emergency savings or other forms of credit in order to pay off sudden, unexpected expenses. If you do choose to undergo this sort of financial risk, know what you’re getting yourself into and plan to pay it off as quickly as possible.