In times of an emergency, not everybody has a credit or the funds to manage this emergency, and this is where a payday loan can be beneficial. There are many reasons people use payday loans, but the most common reason is to cover an unexpected expense such as an emergency car repair or medical bill. Although a payday loan can be beneficial, there are also some drawbacks that you should be aware of before taking out a loan. Before you go ahead and apply for this payday loan, it is wise to understand both the pros and cons of this type of loan.
What is a payday loan?
A payday loan is a short-term, high-interest loan typically for a few hundred dollars. The borrower writes the lender a personal check dated for their next payday in exchange for the cash advance. The lender holds the check until the borrower’s next payday when they must repay the loan in cash or roll over the loan by paying just the fees due and receiving an extension on the loan.
How does a payday loan work?
When you take out a payday loan, you will need to write a personal check to the lender for the amount you want to borrow plus any fees. The lender will hold onto this check and cash it on your next payday when you are scheduled to repay the loan. You can also elect to have the lender deposit the check directly into your bank account.
Before you take out a payday loan, it’s essential to understand how they work and what fees you may be responsible for.
What are the pros of payday loans?
There are several pros to taking out a payday loan, including:
Compared to traditional loans, which can take days or even weeks to be approved, a payday loan can give you the cash you need in as little as 24 hours. With lenders at nimble.com.au, you can get your money in 60 minutes after approval. Some applicants can get the process started and receive their cash within the same day. Such a loan works well for those facing unexpected expenses and who need money right away.
Simple application process
Another pro to taking out a payday loan is that the application process is generally very simple and straightforward. Most lenders will not even pull your credit report, so your credit score will not be a factor in the approval of your loan. The only information you will need to provide is proof of income and employment and some basic personal information.
No credit check required
Most payday lenders do not perform a credit check when applying for a loan. This makes them accessible to those with bad or no credit history. You can still qualify for a payday loan, whether you have good credit, bad credit, or no credit. This can be a great option for those who may not be able to get approved for a traditional bank loan.
What are the cons of payday loans?
Although there are several advantages to taking out a payday loan, there are also some potential drawbacks that you should be aware of:
High interest rates
One of the biggest disadvantages of payday loans comes with very high-interest rates. These rates can be as much as 400% APR or even higher. If you take out a $100 loan, you could pay back $400 or more when it’s all said and done. This can make it very difficult to repay your loan, and you may end up trapped in a cycle of debt if you are not careful.
Short repayment terms
Another downside of payday loans is that they typically come with concise repayment terms. In most cases, you will have just two weeks to repay your loan in full. This can be a challenge if you do not have the funds available to repay the loan when it’s due. If you cannot repay your loan on time, you may be charged additional fees or interest. This can further add to the cost of the loan and make it even more challenging to repay.
Potential for default
Because of the high-interest rates and short repayment terms, there is a real potential for default when you take out a payday loan. If you cannot repay your loan, the lender may try to cash your check or collect the money from your bank account electronically. This can result in fees and additional interest charges, further adding to your debt.
While there are both pros and cons to taking out a payday loan, it’s crucial to weigh all factors before deciding. Payday loans can be a helpful way to get quick cash when you need it, but they also come with high-interest rates and short repayment terms. Consider all of the potential risks and rewards before deciding whether a payday loan is right for you.