Payday loans are so called because they are intended to be very short term bridging loans to cover unexpected expenses or emergencies that crop up in the weeks before payday comes around again. These short term loans are often called cash loans or fast cash as the funds are paid directly into a bank account the same day, ready to spend. Payday lenders boast that they offer speedy loans to people who desperately need it and do not qualify meet the formal lending criteria laid down by banks. In addition many payday lenders allow borrowers to apply and receive their cash loan online, making it easier than ever to take out a payday loan. There is an old joke along the lines that if you need money, banks will not lend it to you: if you have sufficient funding the banks will seek you out to lend you money, something of an ironic catch-22 situation!
The Pros and Cons
Instant cash loans loans can work in the event of a genuine unexpected emergency, especially if the borrower is in a position to pay off the loan promptly – or even early – and in full. Some customers find that the repayment of their short loan, including the fees and interest, put them in the position of being short of funds for the following month. If this causes a further payday loan, with yet more fees, the customer can quickly find themselves in an untenable situation, borrowing more and more to service that original, relatively small debt.
Payday loans are expensive when compared to long term loans. Small loans of say, £100.00, can incur fees and interest of £37.00, which does not sound like an awful lot, when you desperately need that £100.00! However, that £37.00 is paid for borrowing the money for just 30 days. Extrapolated out into an annual interest charge, the rate of interest repaid would come to over 270 percent! This is an average rating for this type of small, personal loan; rates of up to 2000 percent are not unheard of.
Cash in advance of payday can be required by people who have suffered an unexpected bereavement, had a car accident or had a large home appliance suddenly stop working in the middle of the month when payday is just too far away for comfort. For those with no savings payday loans can be a lifesaver, as this instant cash loan can allow them to make urgent arrangements without waiting for their salary to come around.
Sadly, there are people who are more or less financially illiterate, not understanding that money borrowed is not free and fast cash; rather it must be paid back, along with administration fees and interest. These are the customers who usually exist on or under the poverty line, spending every available pound as fast as it arrives. These customers may be tempted to take out an ill-considered loan to fund an unnecessary expense such as a holiday or clothing. Once the time to make the repayment comes up, they will struggle to meet it and end up incurring penalty fees and default charges, while still remaining responsible for the debt.
While instant cash loans are more expensive than they appear, they do provide a necessary source of funding to those in the lower income brackets, who would otherwise be forced into making use of 'loan sharks' or illegal usurers who charge even higher rates and offer threats of violence, sexual assault, or even robbery or arson should payments not be made on time. Most payday loan companies are at least legal entities.
The reason payday loans are so expensive is because the lenders expect a high level of defaulting to occur. They have a large provision for bad credit, and are prepared to write off a higher percentage of their loans –although most of them have very strong ties with debt collection companies who will purchase the debt, and then strenuously pursue the defaulter to gain as much of a return on their investment that they can.
- Payday loans are short-term, high-interest loans intended to bridge the gap between an unexpected expense and payday
- Interest rates and fees can be very high as a large proportion of fast cash loans will 'go bad'
- Missing payments, or repaying less than the full instalment, can see a customer starting off on a vicious cycle of debt, charges and more debt.