The Exorcism of Payday Loans

By: Sarah Dinkins

What we intend in this article is to give an objective explanation of this financial product and make clear what are the uses of this loan type.

What are Pay Day Loans meant for?

Pay Day Loans are meant for emergency situations, it's a loan with fast approval that can solve a lack of cash situation but needs to be repaid in a short amount of time (typically by next pay day). The loan amounts are limited, ranging from a couple of hundreds to a couple of thousands at the most.

The interest rate charged is usually high. This is due to the fact that the lender is taking a big risk by lending money to someone without running credit checks or requesting collateral. The risk is mainly covered by charging a high interest rate, by offering only reduced repayment schedules and by providing only small loan amounts.

Common Mistakes

There are a series of common misinterpretations about the nature of Pay Day Loans, about most of the loan terms and about it's requirements. In order to fully understand what Pay Day Loans are for and how you can take advantage of this source of finance, some concepts need to be clear:

The fact that there are no credit checks doesn't mean these loans are meant for people with bad credit. Though people with bad credit can take advantage of pay day loans in certain situations, they are not meant to be used as an alternative source of finance.

People with no credit or bad credit can request a pay day loan. People with no income or bad income shouldn't. Being unable to repay a payday loan can carry serious consequences. Besides the already high interest rates charged for pay day loans, if you fail to repay it, you'll be charged penalty fees and you'll have to pay for other costs. Moreover, your debt may be turned over to a collection agency.

Though you may think that there are no interest rates charged because they advertise a fixed fee every 100 or 1000 dollars or so, that is actually an interest rate expressed in other words. It may be a fixed interest rate with all other costs added up, but an interest rate all the same. For example, if you have to pay 3 installments of 43 Dollars for every 100 Dollars you borrow, you are being charged 29% over the principal. On an annual basis, it is the equivalent of a 126% Interest rate or a 9.66% interest rate on a monthly basis.

The above example shows clearly that pay day loans have changed from their original form. The difference between payday loans and cash advance loans almost no longer exists. Lenders dealing with payday loans now offer flexible repayment schedules (they are no longer due in full the next pay day) and even reschedules if the borrower requests them.

When to request a Pay Day Loan

A pay day loan should be a last resort when looking for finance. If there is no other source of finance, or if there is no time to go through long application processes, then requesting a pay day loan can solve your temporary funding problem. Just remember to repay it as soon as possible because it's not cheap finance and it's only meant for emergencies.

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