What are payday loans and are they worth the trouble? Payday loans might have high interest rates but they also come with a very specific purpose many people forget.
There are 2 kinds of financial services—traditional and alternative. Traditional financial institutions include banks and credit unions. Alternative financial institutions include places like check cashing stores and online payday loans.
Alternative financial institutions provide financial services to those who are locked out of traditional services. You might not be able to get a traditional loan if you have a bad credit score or don't meet the minimum requirements.
So when you need a little help and can't get loan applications approved anywhere else, that's where payday loans can come to your aid.
What is a Payday Loan?
A payday loan is when you take an advance on your next paycheck. Usually, when you take out a payday loan, you'll write a check for the amount of the loan and date it to be deposited on the day you receive your next paycheck. That way, you can get funds from your next paycheck sooner.
Reasons to Get a Payday Loan
There are a number of reasons why someone might decide to get a payday loan. You might have some sudden expenses you weren't ready for, like your car breaks down, your house needs repairs, or you have an unexpected medical bill. You might also need help paying your bills on time to avoid fees.
But these aren't the only reasons why someone might take out a payday loan.
The Disadvantages of Payday Loans
There are some downsides to taking out a payday loan and these downsides are what gives a lot of people problems with payday loans. Mainly, they have higher interest rates (APRs) than many other loan options.
But, the reason payday loans have such high interest rates is because they are easy to get, short-term loans. Because of this, the lender is taking on more risk in order to provide more accessible loans. This higher risk is the main reason for the higher interest rates.
It's also important to understand that the extra costs of interest might still be less than you'd have to pay in fees or overdrafts for not having the money you need right now.