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Pros and cons of payday loans

[Mar 18, 2011.]


Most consumers would prefer to have financial options that would prevent the need for taking out a payday loan in an emergency. However, the recession has left many people with fewer options, especially if their work hours have been reduced or a family member has lost a job. When individuals without a savings account and without a credit card are faced with an immediate need for a child's medicine or to replace a tire, a payday loan can be the only option.

Payday loan disadvantages

Here are the two primary disadvantages to payday loans:

  1. Exorbitant interest charges. One of the biggest arguments against using quick payday loans is that lenders charge an extremely high interest rate. A typical charge for a payday loan is $15 interest for every $100 borrowed every two weeks. Translated into an annual percentage rate, this is about 400 percent. But payday loan borrowers are supposed to repay their loan within the pay period, so only borrowers who repeatedly roll over the debt into additional payday loans will actually pay 400 percent interest.

  2. Inability to repay loan within pay period. The biggest danger for borrowers comes when they cannot repay their payday loans within the initial borrowing term. Consumers get deeper into financial trouble if they are forced to take out more payday loans to repay the initial one. This can result in a vicious cycle of debt that can be difficult to break. But in some states, payday lenders are limited to one payday loan at a time, per borrower. In addition, the loan amount is typically restricted to make it easier to repay.

Payday loan alternatives

When faced with an emergency, some consumers have no alternative to instant payday loans. Some are able to ask for an advance on their wages, borrow from friends or family or make a long-term payment arrangement for the immediate need. In addition to payday loans, some lenders offer other short-term loans that are secured or unsecured. Be careful to evaluate the terms of these loans and make sure you can pay them off on time.

As soon as the immediate need for a payday loan passes, it is time to create a financial plan or consult with a credit counselor to develop a budget with room for saving money for an emergency. Consumers with a savings account can usually avoid payday loans and be better prepared for short-term financial crises.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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