Consumer Critique: Payday Loans

Most of you have probably heard of payday loans before, but may not know much about them. This week’s consumer critique explains how they work and looks at the pros and cons of these programs.

Payday loans are also called check advances or payday advances. They work by offering small, short-term loans. The idea is that a borrower uses the money for a short term cash crunch, paying back the loan and any applicable fees when he or she receives the following paycheck.

Payday loans have received a lot of criticism, some of which is justifiable. Just like with mortgages, there are disreputable companies and predatory lenders out there. However, as an industry, payday loan companies – when used as intended – provide a service that can be a useful tool.

There are advantages to payday loans as compared to traditional loans. Payday loans are usually very easy to get, requiring little or no paperwork and usually no credit check. Processing is fast, meaning that these loans provide instant cash. These loans are also available to people who may not otherwise qualify for any form of credit. For emergency cash needs, payday loans are cheaper than overdraft fees, high-interest credit card balance, or utility disconnect/reconnect fees.

Payday loans also have their disadvantages. Because many people who use this tool are strapped for cash, they may not be able to pay it back by the end of the loan, causing a rollover and an additional interest fee. These fees can quickly add up, creating an astronomical interest rate. Compared to traditional loans or lines of credit, payday loans are very expensive, particularly if they are used for more than the initial two-week term.

If you have a short-term need for fast cash due to an emergency circumstance, payday loans can represent an avenue to get it quickly, without a lot of paperwork. However, caution is needed. If you won’t be able to pay the debt back right away, or if your debt is due to a larger spending-saving discrepancy, then you should probably explore other options.