Payday loans have been around for a while but really picked up steam in the past decade or so. It has been estimated that in 2009, 1.2 million people took out 4.2 million loans. This has only grown since.
The surge in popularity for payday loans is largely attributed to the Internet. Many online payday lending services have cropped up, offering quick, no-nonsense loans. However, while they were once considered helpful by most, the surge in popularity has been followed by a plague of bad media.
Payday loan lenders have been called predatory and compared to loan sharks. New regulations were brought in in the UK to ensure they checked lenders were able to afford the loans. These regulations also lowered the high rates of interest. Despite these new measures, payday loan complaints have almost tripled.
New regulations and complaints mean many people now look for alternatives to payday loans. But are payday loans really as bad as they’re made out to be? As with many things, responsibility is required. A significant amount of the bad press has come about due to irresponsible lenders who are unable to pay them back in a timely fashion.
Benefits Of Payday Loans
Payday loans are intended for short-term purposes. The name in itself refers to the fact they can be used if money is urgently needed before payday. Because of this, payday loans are easy to get, even if you have a poor credit score.
Paying a payday loan back in a swift manner means interest rates won’t be high, and it’s a helping hand until your next paycheck. When they’re used for longer terms, interest rates begin to become troublesome.
In situations where money is urgently needed, many people would turn to their bank overdraft. However, a study found that over a 28-day period, using a payday loan is cheaper than using your bank overdraft.
One study found payday loans help families in need, particularly after severe weather conditions. In disastrous situations, many poorer families relied on payday credit for necessities such as food. Wealthier households didn’t have much need for payday loans. They were found to be useful for families who needed the money to make repairs before payday.
In this sense, they fill a crucial niche in the market. Those who need money in emergency situations are better off using payday loans than turning to unregulated loan sharks. The availability of regulated payday loans means they can be a huge boon in emergencies.
Risks Of Payday Loans
Payday loans and their alternatives have been associated with certain risks. One that is often mentioned is the high rates of interest. Payday loans usually have a high APR. For this reason, those trying to use them over a long term might find themselves in deep financial debt.
It’s also argued that they can lead to poor financial habits. Those who discover the ease of getting a payday loan might come to rely on them. This can lead them down a bad path of borrowing more than they need to, instead of trying to improve their financial situation. If people repeatedly use these loans, they could find themselves in a payday loan trap.
Regulations imposed for payday loans around the world focus on reducing irresponsible lending. Some lenders now require more information on the circumstances of the borrower. This helps to know whether they’ll be able to pay it back shortly or if costs will hinder them.
Scams related to payday loans have also arisen. A Jamaica-based company is being sued for cold-calling Americans claiming they owe them for payday loans. The concern is that some naive borrowers may fall into a scam. But many people who had never used payday lending services also received these calls, so they could happen to anyone.
Responsible Payday Lending
Payday loans are only recommended for certain situations. They’re generally meant for emergencies. Those who need their car fixed, but won’t have the money until next week, might turn to a payday loan to cover the bill.
Those who need to make personal purchases, such as cars, houses, or holidays, should not use payday loans. For big purchases, personal loans are available from banks with lower APRs. But for many personal purchases, you should use savings instead of loans. Better financial habits are preferable to putting yourself in debt.
Additionally, those who make use of payday loans should ensure they pay them off as soon as possible. If you take out a payday loan and can’t pay it by the time you thought you’d be able to, consider asking a friend for help. Owing someone you know for no interest is better than accumulating extra costs.