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Pros and Cons of Payday Loans

[Mar 5, 2010.]


The Consumer Federation of America and the Federal Trade Commission have issued warnings to consumers about the dangers of predatory lenders and the possibility of unwitting Americans becoming mired in debt through the use of payday loans. Instant payday loans are easy to obtain and certainly there are concerns about what happens when individuals don't repay payday loans on time. Short term loans have both negative and positive aspects.

Payday Advance Loans Negatives

  • The biggest problem with payday loans is when families in trouble turn to these loans as a quick fix and then have trouble repaying the loans on time. A large percentage of payday loan customers extend these instant payday loans, which can create an expensive debt problem.
  • The other reason financial experts rarely recommend payday loans is they are generally extremely expensive. Lenders are supposed to provide an Annual Percentage Rate (APR) for every loan, but some payday loan companies use the term finance fee and do not reveal the true APR. Payday loan customers should look for a lender who openly publishes the APR. For example, a fee of $20 per $100 for a payday loan may seem as if the lender is charging 20% interest, similar to many credit cards. However, the $20 fee per $100 is charged every two weeks. This fee is the equivalent of 26 times that credit card interest! Payday loans sometimes have an APR of anywhere from 250% to 650%.

Positive Aspects of Short Term Payday Loans

  • Despite the high interest rates, the best payday loans can sometimes be a good choice for consumers. First, these loans are not meant as a long-term source of credit, so the high interest is only paid by someone who has too many payday loans and cannot pay the money back.
  • Payday loans are designed to be a short-term emergency solution.
  • The average payday loan is small, about $200 to $500, which should be easy enough to pay back quickly. Most lenders never loan more than $1500 on one short term payday loan.
  • Bad credit payday loans can be the only credit available for consumers while they are working to rebuild their credit.
  • An easy payday loan can be less expensive than overdrawing your bank account, with bank penalties often topping $30--and the recipient of a bounced check may also charge a fee.

Consumers who need cash for an emergency and cannot access other credit can benefit from the occasional use of a payday loan as long as they understand the importance of repaying the loan as soon as possible. Rebuilding credit and a savings account for emergencies should be the next priority after repaying the payday loan.


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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