Payday Loans: Good or Bad?

Many folks have heard of payday loans at one time or another. They may have overheard someone talking about them. Maybe they read about these payday loans online. A lot of individuals have strong opinions on the matter.

Payday loans have developed a mixed reputation over the years. Some will tell you that payday loans are unwise. They may go so far as to consider these loans a trap. They often refer to the higher interest rate that can accompany payday loans. Some people refer to issues dealing with telemarketers or spam Emails after dealing with a payday loan issuer.

Other individuals will tell you that they utilized a payday loan with no ill effect what-so-ever. Still others will claim that their payday loan helped them get out of a jam. They will tell you that a payday loan was just right for them and would recommend one to their friends.

How can there be such contradicting opinions regarding payday loans? What has happened to form such conflicting views about these loans? Let’s take a deeper look into what makes payday loans work and how people’s opinions might have been shaped by them.

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Short Term

Payday loans are a short term cash advance that an individual promises to pay back in a very short time. This may be where a number of folks run into trouble.

The point of a payday loan is to make cash that one would earn over the next few paychecks available immediately. That being said, it is wise to consider how much one can afford to borrow. That may sound like an odd statement but, it does put in perspective that the loan will need to be paid back after a short time.

A number of people may be used to the average bank or automobile loan. These loans may go on for months or possibly years. A house mortgage is a loan that potentially lasts for decades. These people may be accustomed to a longer time frame and have trouble with the interest rate involved with a payday loan if they attempt to drag out the process of repaying the loan. A payday loan is not intended for an extensive period of time. The interest does tend to be much higher than other loans. So why get one?

Once again, payday loans are for very short periods of time. A bank or mortgage lender keeps a lower interest rate because they make money off of the loan over a larger length of time. A payday lender has very little time to make any return due to the short term of the payday loan.

All the aforementioned lenders will want to make some return on their loans. That is the incentive for individuals and institutions to become lenders and make their finances available to others. Many payday lenders also forego FICO credit score checks. This added risk must be factored in to the interest rate. All these factors make sure both the lender and the borrower have the chance to come out of this arrangement a winner.

So, if you wish to get a payday loan for a short term of a couple weeks until your next couple paychecks enable you to return the loan then, you’d be using a payday loan correctly. Your loan would give you needed funds when they are not available and you would pay off your loan when the funds are available.

If you have bills pending payment, applying money from a payday loan and paying it back with the interest may turn out be less expensive than having to pay late fees or bank fees applied to your account if you should have the misfortune of over-drafting.

Third-Party Lenders

Now, let’s look at the issue of those that have complained of being harassed or besieged by telemarketers and Emails. Unfortunately this is largely due to unscrupulous third-party lenders. What is that and why does it matter?

A third-party lender is someone who acts as a liaison, or go-between, connecting borrowers with lenders. There’s, obviously, nothing wrong with that.

Sadly, some third-party lenders see an opportunity to profit from selling client information to other businesses. As a go-between they’ve been privy to your personal info and they make it available to the highest bidder.

Do all third-party lenders do this? No. However, a better question to ask is do you know which ones engage in this practice and which few do not? Choosing to deal with a third-party lender is done at one’s own risk.

There is a much safer option. Direct lenders, or those payday lenders that own the financial institution lending the money, make their money by dealing in loans, not by serving as a go-between. You deal directly with the lender whose business is lending money, not selling personal information. By dealing with a direct lender you avoid the woes some people attribute to payday loans without themselves knowing the specifics.

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Payday Loans Summary

Lastly, is a payday loan good or bad? The answer to this question depends on your situation, your time frame, and the decisions you make.

If you take a chance on a third-party lender or borrow when you know it will take a longer time than you admit to in order to pay back the loan than you may have an unpleasant experience.

If you are honest to yourself as to how long it will take to pay off the loan and are careful in regards to your choice of lender then, you may find that a payday loan is just what you needed and have a very positive experience.