Payday Loans: What’s the Catch?

Living & Spending
on November 29, 2012

Although payday loans are usually much more convenient and expedient than the traditional loan process, there are a few disadvantages that a borrower must consider before he or she takes the plunge and decides to finance a loan through such a company. Although payday loans companies hardly deserve the reputation that the traditional banking industry gives them, a savvy borrower will definitely go over the advantages and disadvantages of obtaining a payday loan before signing to any guidelines.

How Payday Loans Differ from Traditional Loans

Payday loans are much more convenient than traditional loans because the companies that are underwriting payday loans are much more local. If a borrower has a problem with the terms of the contract or the contract needs to be renegotiated because of an unexpected emergency, he or she can usually get in touch with the underwriter directly. This is not the case with the loan process of a large, traditional bank.

Payday loans are also much easier to get online. Many payday loans companies do business online exclusively, saving them the expense of manpower and hardware. Payday loan companies are also much less interested in your long-term financial history and your credit report. It is well documented that long-term financial history of an individual has very little to do with the ability or the willingness of that person to pay back a short term loan.

So What’s the Catch?

Although there are many advantages to payday loans such as the ones mentioned above, there are also some disadvantages to consider. The term period for payday loans is usually much shorter than for traditional loans. This means that a borrower should only consider a payday loan if he or she thinks that it will eventually end up saving money because of the shorter term.

Payday loans also usually have a much higher interest rate than traditional loans. If your main concern when taking out a loan is saving money, you may want to consider another option, especially if you have trouble paying back short-term loans within a specific term. The penalties for missing a payday loans payment are usually much more severe than the penalties for missing a payment on a traditional loan. If you already have bad credit, missing a payment or two can wreak havoc on your long-term credit history.

Most payday loans also have a limit on the amount of money that can be borrowed at once. In most jurisdictions, this limit is US$1000. If you need more money than this at once, you may want to consider another option. However, this can also be a blessing because very few people who take out a payday loan borrow more than they are able to pay back. This characteristic of payday loans tends to help people who are saving money for large asset purchases.

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