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Payday Loans as Last Resort?

Wednesday, December 8, 2010 13:42

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Since the beginning of the current recession three years ago, conventional lenders have implemented much more strict rules on lending money after most of them taking a big hit from the collapse of sub-prime l0an business. That makes borrowing money a lot tougher in bad economic times, even for credit worthy borrowers. And this is one reason payday loans has become more feasible to use, especially for those who don’t have access to traditional banks or credit unions, because of the relaxed qualifications and the so called “quick money” aspect of getting it. Yes, we know payday lenders are disastrous to your finance and yes, we know payday loan interest rates are a lot higher than that of a conventional loan. However, if there is no any other means to obtain a loan, turning to payday lenders can be the last resort.

What is Payday Loan

According to Wikipedia, a payday loan is just as the name suggest, it is a small, short term loan to hold you over until your next payday, so you can use the money to pay your bills and buy necessities. Sometimes, payday loans is also called cash advances, which, however, are different from withdrawing cash from a credit card.

How Payday Loans Work

There are two types of payday loan services, a direct lender and a payday broker.

Direct Lender – You can go online and find lenders who don’t use middle men. By cutting of the middle men, you are able to get cheap money (compared to other payday services of course) and you can get quick money when you need it the most. The downside to direct lenders is they may be stricter on qualifications. In this case, you sometimes might have to apply at several different direct lenders before getting approved.

Borrowing money from direct lenders is usually time consuming, therefore if you need money fast this type of payday service might not work for you.

Payday Broker – The advantages of a payday broker is you only have to fill out one application. You will know in a matter of 20 minutes or so if you qualify or not. Once your application is approved, they send it to the lenders pool for the next step. Don’t expect the so called “cheap money” compared to direct lenders, but there is competitive bidding within the lenders pool. Once a lender accepts your application, and you approve the terms, the funding process starts. It can take anywhere from 12 to 24 hours for the money to go into your bank account.

If your agreement with the payday service on paying back the loan on your next paycheck, then they will debit your checking account on that day when the check arrives at your bank. Since the lenders basically just want somewhere to debit, some payday services will let you use a saving account. Be very careful that if you have trouble paying back the loan, do not let it default because the fees and penalties are killers. Contact your payday service provider and make payment arrangements that you both agree. It may cost you more in the end but not as much as doing nothing.

Qualifying for Payday Loans

Compared to conventional loans, the biggest attraction of payday loans is simplicity and fast. First of all you can get a loan online, the application process takes about 15 minutes and there are usually no credit check or anything to verify your qualification. The general requirements are that you must be 18 years of age, make at least $1,000.00 a month, have a checking account which your paycheck is deposited to and be employed for 6 months or more. Before taking the loan, you need to know the rules and fees so you can make sure how much it is going to cost you and what are the consequences if you fail to payback the loan.

Payday Loans as Last Resort

You will see people using payday loans for utility bills, auto repairs, health situations, these are all legitimate uses and as a last resort. One can’t really argue that people shouldn’t go to payday lenders in situations like these. In some cases, payday loans are the only resort until you recover from a financial crisis. As mentioned before in a tight economy, payday loans fill a void for many people who urgently need cash quick. The fact that you can find payday loans shops in many places also suggests that there are demands for such services (payday loans are currently regulated and legal in 37 states including Virginia. In other 13 states, they are either baned by state laws or not feasible because of hard interest rate caps). However, because payday loans are high risk, high interest rate loans, they must be handled with care. You must be reasonably sure you can pay the loan back as agreed, or otherwise, payday loans can ruin you financially, as fast as you can get the money.

The Downside of Payday Loans

Payday loans are only supposed to solve money problems you are facing right in front of you. They are for people who have no credit or bad credit, people who need cash fast or those who need a short-term loan. Therefore any plan of using payday loans for long-term problems is a bad idea. (I am not going to discuss any long-term problem or long-term solution here.)

There is one other point, which can be either a pro or con, depending on you. Payday loans help you rebuild your credit. If you know the rules and respect the process, using payday loans can increase your credit score. Of course the opposite will happen if you misuse the loan service, just like what happened to some people when they turned to credit cards for emergency cash and got burned badly.

Conclusions

People who use payday services generally can’t borrow money anywhere else. The intention of payday loans is for short term emergency situations. They usually max out at $1,500.00 and you cannot have two loans going at the same time. The application process can be done online and doesn’t require faxing a lot of documents for the application process.

One thing you always need to remember before going to a payday lender: Know the rules, fees and penalties before you sign for any payday loan.