What is a “Payday Loan”?

“Payday Loan” is a very short-term loan — usually for a few weeks — that people who need to access quick cash may borrow to cover financial obligations until they get paid. In the past all payday lenders operate from a storefront, but nowadays some can be easily accessed online.

For this reason, payday loans companies are some of the fastest growing companies around today. A lot of it has to do with people needing money fast in the troubled economy. 

Sometimes a payday loan may seem like the best option for people who don’t have an emergency fund or who have poor or no credit, but it could turn out to be a very bad idea for especially people who don’t understand how the interest rate works. So while it’s a quick way to get some cash when you find yourself in a jam, they aren’t the best choice in most situations. 

But why? 

Most payday loans have over inflated interest rates. Some payday loans attract interest rates as high as 500%. Imagine the negative effect for people who take them regularly. That being said, they aren’t all bad, in some instances. 

Sure, the media likes to target them relentlessly which is justified in most cases, but there are a few payday loan agencies that are really there to help people out of a bad situation, and will provide some much-needed cash when you need it most. Unfortunately, the good ones are usually far and in between, and more difficult to find.

Many of us may find ourselves facing a financial emergency at one time or another. If we have the means of dealing with these situations, then it’s easier to handle them. But what if we suddenly find we don’t have enough money?

All of a sudden an unpleasant situation starts to spiral out of control. But you may find that you’re in an even worse predicament if you resort to a payday loan. What may seem like a small fee actually translates to a very high price to pay for borrowing a few hundred dollars.

For example, consider the situation where a person borrows $500 for 2 weeks and has a loan fee of $80. To some people, $80 dollars may seem like a small price to pay, however, if you calculate the annualized interest rate on the loan you will realize that it is rather bizarre.

$80 is 16% of $500 which may seem like a reasonable interest rate, but what many people who take payday loans don’t understand is that the interest on such a loan is 16% for 2 weeks. Since there are 52 weeks in a year, the annual interest rate is a whopping 416% (16% x 26). This is why payday loans should be avoided as much as possible!

However, despite the high interest rate, people with poor or no credit who may not have a credit card or a line of credit may find it more dignified to get a payday loan than having to go into a bank to apply for a personal loan and be turned down by some heartless banker sitting behind a desk with an ego that is bigger than the room.

But it is still important that consumers explore other options before resorting to a payday loan. And at the least, they should be knowledgeable about how they work, and know what they are committing to before they sign on the dotted lines.

The takeaway here is that you should explore alternative options to access funds to cover financial emergencies. However, if you feel you have no choice but to take a payday loan when faced with tough situations like these, it is important that you read over the terms of the loan before signing anything, and make sure you understand them. 

Payday loans should be a last resort and it is important that you take only what is needed because the higher the loan amount, the higher the interest penalty in most cases.

Plus try to avoid recurring payday loans that take more money out of your pocket. And do repay the loan based on the terms you agreed to because these companies can become “vicious” when you are delinquent and they need to recoup their money.

The term Loan Shark, even though used inappropriately most of the time, didn’t come into existence for no reason.