Often, people see commercials for something called a payday loan. Despite the current hesitance towards taking any type of loan (based on the college loan crisis plaguing current college graduates), recent findings show that “payday loans” may actually help to pave the way to financial success.
What is a Payday Loan?
Payday loans are the pejorative term for short-term loans with a comparably high interest rate. For the most part, pay day loans are capped out at £500, meaning that a person is unable to borrow more than the allotted £500. The understanding is that the loan will be repaid upon the borrower's next pay check. Different states have different laws regarding payday loans, so depending on the state in question, payday loans might be attainable through a storefront payday lender organization or an online payday lender organization.
In general, people are given two to four weeks to pay the loan back, but the specific date is always outlined in the contract. There are several state laws that clearly set a maximum amount for a payday loan fee. Research shows that, in general, the fees range from £10 to £30 per £100 borrowed. In other words, if someone were to borrow the general maximum payday loan, £500, the borrower would pay between £50 to £150 in fees. If one were to look at the APR of a payday loan is astronomical. For example, if a payday loan were to charge £15 for each £100 borrowed, the APR would near 400%, whereas most credit cards range from 12% to 30%.
Most often, people are expected to pay back their payday loan in one lump sum. Usually, in advance, one would write a post-dated check for the total (the loan plus the fees). Sometimes, borrowers allow the lender to electronically take money from the borrower's bank. If the payday loan is unpaid or late, it is not unusual for lenders to cash the check regardless, or, if the case allows for it, to withdraw money from the borrower's account electronically.
Why Do People Use Payday Loans?
Some readers may read the above section and wonder why anyone would use payday loans when they seem problematic. However, this is not true. Payday loans are incredibly useful to people.
First of all, payday lenders do not use a credit check to scan their borrowers. Credit checks can be stressful, embarrassing, and actually harmful to one's credit if they check too frequently. The fact that payday loans do not check a borrower's credit allows for people who have made some financial mistakes in the past have the same access to achieve success as their more financially fortunate contemporaries.
Secondly, they are fast. They are intended to help in case of emergencies and serve as a spare tire to families stranded on the side of the road because life events left them with a flat. While some may argue that the APR rate is too high, thus rendering payday loans useless. This could not be further from the truth. Payday loans are intended to be paid right back. To pay a 400% APR on a onetime loan is actually far less expensive than what credit card companies do. While the APR may be low, banks expect that borrowers to pay the minimum each month, thus costing more in fees than a payday loan.
How Can Payday Loans Lead to Financial Success?
In a society built on the notion of the American Dream and the possibility of social mobility, it is not always as easy as it should be for people to get the resources that they need. Payday loans not only give the average American a chance at the American Dream.
Often tragedy strikes at the least convenient times. Cars break down on the way to work, emergency hospital or vet visits happen, and a million and one other expensive obstacles can be hurled in the way of people just trying to live out their dream. Payday loans are excellent because these quick loans allow for lives that would normally be disjointed to go on smoothly. For example, after being between jobs for a few months, a man finds a perfect job for him. He has to wait a month before payroll begins to process his checks and his car breaks down on the way to his first day at work.