With the current economic climate and rising inflation, people are more strapped for cash now than ever before. One of the ways with which they try to finance their needs is by borrowing loans. However, securing a loan may require a long waiting period and strict eligibility criteria. An increasingly popular alternative to traditional loans is payday loans. If you’re wondering whether to opt for one or not, we have curated a list of pros and cons of payday loans below:
Table of Contents
Pros
1. Convenience
One of the most significant advantages and the main reason for their popularity is that they are easy to access and quick to procure. Unlike traditional loans, you can just go online to apply and have the money in your account within 24 hours. This is convenient in cases of emergencies and unexpected expenses, such as home repairs or hospital bills.
2. Fewer Requirements
The eligibility criteria for payday loans are considerably less comprehensive than traditional lending options. For example, My Canada Payday requires borrowers to be employed, except for pensioners or those receiving disability and child tax benefits, and earn at least $1000 a month. You are more likely to be approved for a loan by payday lenders than you would by conventional ones. This is one of the biggest reasons that payday is gaining traction, as 12 million Americans take out payday loans per year.
3. Overlooks Bad Credit
You also need a good credit history to get a bank loan. However, payday lenders are not interested in your credit history and won’t check your credit score. Instead, they are more focused on whether you have a stable stream of income to pay the loan back. Even if you have a questionable financial past and a bad credit score, it will not hinder your ability to secure a loan, but if you do not repay the loan on time, it can affect your credit.
4. You Don’t Need a Collateral
Often when people do not get approved by banks for loans, their second option usually is collateral loans that require borrowers to stake their assets. This gives the lenders the right to seize the assets if the loan isn’t repaid. Payday loans are not secured by personal property, so your assets will be safe and out of the lender’s reach.
Cons
1. High-Interest Rates
Payday lenders charge very high-interest rates. In America, the average payday interest rate is 400%. In comparison, other personal loans are more feasible, as their interest rate varies between 10% and 32%, depending on your credit score. Payday lenders don’t check your credit score, so you can be tempted to go for them. As a result, the chances of you not being able to repay your loan are higher, and you are more likely to get trapped in a debt cycle.
2. Debt Cycle
Once you are in debt with such a high-interest rate, the likelihood of you taking more loans to repay your existing ones is very high. This can snowball into massive debt and trap you in a borrowing loop you can not escape from, as a loan meant to be paid off faster may take years to repay.
3. The Lenders Can Sue You
In case you don’t repay your loan, the payday lenders can take you to court. This will not only be mentally stressful but fighting legal battles is costly and may result in further financial strain on top of your existing debt. This can push you further into the debt cycle and have significant consequences, such as imprisonment if you lose the legal battle.
Endnote
The feasibility of payday loans is subjective to different individuals. They may seem like an easy and quick solution to urgent monetary needs; however, such loans may lead to more harm than good. The chances of you ending up in a more financially stressful situation than you started with are high. This is why it is essential to do your research and ensure you are looking at all your options before making such a crucial decision.
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