A payday loan is a short term loan that a consumer may borrow until their next payday. Once the borrower receives their next paycheck, they must repay the loan, along with whatever fees are associated with the loan. This makes it possible for borrowers to get money quickly if they should find themselves in a tough spot.

Like many other financial decisions, there are positives and negatives associated with taking out a payday loan. Borrowers will want to consider both sides of the spectrum, in order to make an informed decision. Sites like www.paydayloanfacts.com help consumers understand the pros and cons, and we're here to do that too (help consumers, that is!).

The Benefits of Payday Loans

Many times, if a person needs money to cover an unforeseen expense, they will just charge the amount to their credit card. But what if they've reached their credit limit or don't have a credit card? If a person has bad credit, they will not normally be able to obtain new credit on such short notice, unless they have a generous friend or family member. These are the kind of situations that call for a payday loan.

For people with bad credit, payday loans may sometimes be their only option. Payday lenders will not check an applicant's credit. As long as a person is employed, makes a certain amount of money each month, and has been employed for a certain amount of time, they will usually be eligible to receive a loan.

Payday loans are not only available to high risk borrowers, they can save borrowers a significant amount of money. Consumers that won’t be able to pay their bills on time or are at risk of over-drafting their bank account can take out a loan to cover these expenses. Overdraft fees and late charges add up very quickly. Also, if a consumer already has a low credit score, they really won’t want another late payment making its way onto their credit report.

The Negative Side of Short Term Loans

Unfortunately, there is also a dark side to payday loans. Customers can expect to pay for the convenience of obtaining a loan so quickly and easily. Most lenders will charge a fee for every $100 borrowed.

For example, if a person borrows $100 to cover a bill, they may be required to pay $120 back within two weeks of receiving the loan. At first, this doesn’t sound too bad. After all, most over-draft charges are around $30 or more. However, what most lenders fail to disclose is the APR, or Annual Percentage Rate, that they are really charging for that loan.

The average payday loan offers an APR of anywhere from 250% to 650%. Considering that the average credit card charges an APR of 15% to 20%, the rates on payday loans are astronomical.

Borrowers will also incur more fees if they cannot manage to pay the loan back on time. In some cases, taking out a few payday loans becomes a vicious cycle that ends in an overwhelming amount of debt. Of course, if a consumer only borrows as much as they need and can afford to repay, payday loans can be very beneficial. Unfortunately for consumers that are already struggling to pay their bills, adding this extra expense may end in financial disaster.