Payday loans, which are also termed 'cash advances', are loans given out for a short period of time, and amounting to a few hundred dollars (In fact, a number of states have placed a cap on the upper limit that can be borrowed in a payday loan). Here are a few things you should know about these loans so that you can make an informed decision about whether you should borrow money on these terms.
First, a little about how these loans work. To avail of such a loan, the borrower has to write a check in favour of the lender, which becomes payable any time in the next two weeks or a month or more, depending on the terms of the loan contract. Usually, the lender will cash the check only on the next pay day of the borrower.
You must have observed that payday loans are often severely criticised by some as being exploitative. They have received this tag because of two reasons mainly. One is that the fee which must be paid in order to get a payday loan has been known to be pretty high in some cases. However, a number of jurisdictions have enacted usury laws against the same. Still, the interest to be paid each year for a payday loan is very high. The other time these same day loans can be a bad deal is when the borrower fails to pay back the loaned amount in time. In such a case, the borrower 'rolls over' the loan. This extends the time for payment, but more fee is charged for the same. Often, this leads to a vicious cycle as the amount to be paid back goes on increasing.
Like a number of credit instruments, payday loans have their pros and cons. If used without discretion, they can lead to financial woes, but can also be very useful if resorted to at the right time. Payday loans are effective because they are unsecured loans and require no more checks into your financial situation than seeing whether you have a paying job. This means you can get a loan very fast and when you need it.
The only things you need to remember when taking out payday loans are: borrow only the amount that you are sure you can pay back when you receive your next pay-check. Use a payday loan only in an emergency, not for funding impulsive purchases that you can do without, and in no scenario take a payday loan to repay a previous payday loan.
