What is a Payday Loan and How does it Work?

The global economy is going through a phase of contraction right now. And for the masses, this is not good news. For most people, it implies that the cost of their day to day expenditure is going to rise while their disposable incomes are not. It is tough to manage day to day expenses regardless of how much your net income is and people are spending a large portion of it on food and utilities which previously was not the case. And this imbalance of relatively low income and high expenditure is getting worse with each passing day.

Sometimes when you are under the pressure and when things are not working out and you land yourself in a critical situation where a financial emergency strikes while you face a cash crunch and with no options to go, what would you do? Your expenses are ever-increasing and a fall in the cash leaves you stranded, and unable to sustain the interest payments of your credit cards and other debt, how are you going to manage?

These are the questions that you need to answer and fortunately for you, we have one that is Payday loans. They are your answer to the situation when you are short on cash and out of all options.

What is a Payday Loan?

A payday loan is your cash advances, usually offered for a short-term basis. These short-term loans are given out for a period of one or two. They provide you with the option of low balance borrowing when most of your options are exhausted. They can be extremely helpful especially when you get through a rough period. Their simple structure makes the terms of agreement quite easy to understand, and they are to be repaid till your next payday.

Moreover, with all its benefits comes there are some downsides attached to it as well. Although these loans work at times, however with the exorbitant interest rates make them an unattractive option to the most customer. And their hidden charges and added fees don’t do them any favors either. These predatory features are usually the ones that the customers are not made aware of at the time of the borrowing and they come as an unpleasant surprise when once you have borrowed the money.

So how do they work?

These loans offer you a quick cash relief usually up to five to six hundred dollars and they are to be repaid once you get your next pay. To opt for a payday loan, you have to first fill in a form, mentioning the amount you are borrowing and submit it with a post-dated check along with the fee surcharge that the lender might charge you. Once, your application is approved you are good to go. After the borrowing, you would have to check in with the lender sometimes again later, to repay him again.

If you are unable to do so then you have the chance to roll the loan over until the next due date. However, its drawback is that even though you might get the loan extended however the fee keeps on getting aggregating and this can turn out to be a honey trap for most customers.

Overall, these loans are generally expensive, and their annual percentage rate happens to be a lot higher than these conventional loans which you borrow from a bank. This can be understandable since it does have higher default risk. Even though their exposure might be less since the borrowed amount is low, most of their loans have a poor credit rating. These loans are usually offered without checking credit history or background, and such is the case that individuals opt for this even if they had a really poor credit score.

Cost of the Payday

The biggest issue with these loans is their exorbitant cost. Even though they might provide you with short-term relief, however, they cannot solve your long-term financial woes. And given that they charge high surcharge fees, your financial problems are set to aggravate even further. And if you are in a situation where there is a need to consistently rely on payday loans then this is not good news. You need to reconsider your strategy and look out for another option. These loans are not meant for your long-term cash woes.

If you keep continuing with it, they might even land you in trouble. Alternatively, you could talk to your supplier and ask for an extension or maybe even approach a bank and see if somehow you could get a traditional loan.

Role of Banks:

Higher revenue and in turn profits have attracted the banks to move into the industry as well. For a conventional loan, your credit history, your bank account, and your financial assets and your income details are what you need to submit to apply for it, however, these requirements are not so important when you apply for a payday loan from a bank. The only mandatory requirement is that you have a bank account that you are applying to. Moreover, these payday loans are not any better from the ones that other institutions and stores, who provide them. These loans have predatory features installed in them and they too are quite risky and unsustainable for the long term.

Furthermore, in certain situations, they might even be considered worse than the usual payday loans. To qualify for a payday loan from a bank, you have to sign a waiver which allows the bank to pull off funds from your bank account at the time when the payment is due. This leaves you stranded as you don’t have the control of your account or the money that flows in there anymore. Whereas, when you go for a payday loan from an external source, other than the bank, at least you have the option to choose when the money goes out and when it doesn’t.

What are your options then?

If you are consistently heading in this direction, you need to rethink it. There are several things that you can do which include cutting down your expenses, delaying the payment of your utility bills or if nothing else that maybe do a short borrowing from friends or family. There are several alternatives to it and anything is better considering that you are not opting for a lifetime battle of never-ending loan repayment cycle.

Conclusion

Payday loans might be a fast and easy way to get you cash but these loans shouldn’t be your long-term strategy. They might work for you once or twice for a short while, but they won’t in the long run. Before opting for such loans, you need to rethink and revisit all the options. They might look attractive from the top but on the inside, they aren’t so great.

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