Payday loans - the pluses and minuses
Payday loans can be useful for helping you get through a temporary cash crunch. Your car breaks down and you do not have transportation to get to office. And getting to office is essential if you are to continue getting that paycheck.
In such situations, payday loans can be lifesavers. However, they should be used with caution.
The loan period is quite short — typically a couple of weeks to three weeks. Basically, these loans are meant to tide you over till your next payday. And in most cases, the amount borrowed is just a few hundred dollars.
Getting these loans is fairly easy. You write a check for the amount of the loan plus a fee stipulated by the lender. This check is given to the lender and when you are ready to repay the loan, they just cash the check.
One of the attractions of a these loans is that they are often available even to those who have poor credit scores — they function as short-term bad credit loans to help meet an emergency.
Payday loans carry a high interest rate. The APRs are often 400%++. That’s astonishingly high. However, if you are only borrowing a few hundred dollars, the absolute amount of the interest won’t be much provided you repay on the due date.
Therein lies the problem with a payday advance — you do NOT have to repay on due date (usually). You can choose to roll over the loan. And that is where the danger starts.
Once you roll over a loan, you are charged fresh fees, often at a rate higher than what applied to the original loan. If you keep rolling over the loan, the fees accumulate — very rapidly.
And before you know it, you are neck deep in debt with no visible way out.
This is why payday loans should be used only as short term borrowings. As long as you repay the loan at your next payday, the risk you face is limited. If not, you face an open-ended liability that can lead to serious financial problems.