Payday lenders seem to be on every corner in most major cities. This points to two key issues – a large segment of the population needs financial help from time to time, and there appear to be minimal options for those who need cash quickly but don’t want to visit a payday lender.
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When seeking a source of quick cash, it is important to understand the basics of each specific loan type. Payday loans are generally the quickest source of cash, with money in hand in literally minutes. But what are the tradeoffs for this rapid turnaround time?
Payday lenders are just that – providers of loans that are designed to span the time gap between two paychecks. For those that need cash immediately and cannot wait until their next paycheck, a payday lender provides a financial bridge that gets the borrower out of immediate financial trouble. It is important to note, though, that the loan must be paid back upon receiving a subsequent paycheck – so it is vital that the borrower plans for the repayment money to come out of their account during their next pay period.
Payday loans are certainly a method of accessing cash quickly, but that rapid access comes at a cost. The interest rates on payday loans can quickly become predatory, with “several hundred percent” annual interest rate loans not uncommon among payday lenders. A payday lender who charges $50 in interest on a $500 advance for two weeks is effectively charging a 260% interest rate. For many, this is simply too costly a way to borrow money.
Fees are another issue to consider. Though the loan is only a short-term fix, it is important to factor in the upfront fees that a payday lender may charge. Fees like administrative fees, credit report fees, processing charges, and application fees can quickly add up and reduce the overall benefit of taking out a payday loan. These fees should be clearly communicated prior to signing for the payday loan.
One final consideration to make when investigating a payday loan is the amount of cash the borrower needs. Payday loans are fairly low dollar loans – typically limited by the amount of money the borrower makes on a per-paycheck basis. Other loans types on the market today might make more sense for the borrower who needs to access additional funds or who needs a longer term loan.
Weighing the Pros and Cons of a Payday Loan
Payday loans usually offer a quick and simple application process and access to cash in minutes. They are designed to accommodate short-term cash borrowing needs only, and don’t commit the borrower to a loan for more than a few weeks.
Drawbacks to payday loans revolve around lack of access to significant amounts of money, extremely high interest rates, the potential for upfront fees that reduce the benefit of the loan, and the potential for getting trapped into the “payday loan cycle,” in which borrowers need to take out additional loans to payback previous loans.
Payday loans have their place, but for the borrower who values quick access to significant amounts of cash at reasonable interest rates, it may make sense to investigate other loan types. Some borrowers have found that vehicle title loans or title pawns provide quick access to cash, reasonable interest rates and fees, no credit score requirements, and more favorable repayment terms than payday loans.
Other loan that is quite interesting would be the Costco car loan.
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