A payday loan is an unsecured cash advance of small amount that attracts very high-interest rates. The repayment period for such loans is usually short.
Most lenders target borrowers who are in urgent need of cash and lend money regardless of their credit scores.
According to a study done in 2015, over 12 million American Americans take payday loans, for various reasons. The study also found out that Americans spend $7 billion as loan fees.
In most cases, the interest rates as disguised as loan fees – ranging from 300 -500%.
The pew survey revealed that a typical loan ranges from $100 to $1,500. Lenders usually target salaried workers who earn at least $2,500 a month.
These lenders understand that most of these workers are unable to access credit from banks and other financial institutions because of their poor credit scores.
Loans in the United States have increasingly become popular. They are common in store-fronts of low-income neighborhoods.
Most of their customers are individuals who often have an urgent need for cash but have poor credit scores. This makes them primary targets for lenders who are keen to charge high-interest rates because of their vulnerability.
Pros & cons of payday loans
1. Easy to get
One of the major advantages of such loans is that they can easily be accessed. Most of the lenders are able to issue loans within 24 hours. Contrary to conventional loans, which usually take long to apply, these particular loans can take as little as 10 minutes.
2. They don’t check your credit score
Another advantage of these loans is that lenders don’t use a borrower’s credit history to determine whether they will get a loan or not. This means that a borrower will only have to prove their ability to pay to get their application approved.
3. The loan is unsecured
Unlike traditional loans, a borrower will not be asked to produce any form of collateral for his or her loan to be processed. Most lenders are only interested to know if the borrowers as a stable source of income or not.
4. Fewer requirement compared to traditional loans
One of the reasons why people don’t borrow from traditional lenders is the tedious application process. Banks and other credit facilities will always demand a photo ID, a Social Security Number, credit status among other requirements. Most fast-cash loans won’t ask for all those details.
1. They are expensive
This is one of the disadvantages of these loans. On average, borrowers pay up to 400% in terms of interest. This is unlike traditional loans where borrowers pay as little 4% to 36% as interest rates.
2. You can easily be trapped into a debt cycle
There is always the risk of rolling over your debt with these kinds of loans. The downside of it is that the more you extend your repayment date, the higher the interest rate becomes. This means that a borrower will end up paying debts for the longest time possible.