What Is a Payday Loan?
A payday loan is defined as a cash advance for a short duration of time. These loans are relatively easy to obtain therefore many people with bad credit will seek out these loans for assistance. When applying for a payday loan there is no collateral required or a credit check. The payday loan company will ask for a postdated check from the consumer’s checking account. This check will be postdated for the next payday.
Why Should a Debtor Avoid a Payday Loan?
Just because a payday loan is easily accessible does not mean that this type of a loan is a good idea. There are more known disadvantages than advantages when it comes to payday loans.
The most common reason to avoid a payday loan is the incredibly high interest rate that is associated with a payday loan. It is not uncommon to find a payday loan with a rate as high as 200 or 300%. This high of an interest rate will put a person who is having financial difficulty into a larger financial crisis.
The repayment of a payday loan is not easy for someone who is not in a position to make large payments. When payday comes around and the postdated check is cashed it will include the amount of the principle and the large interest rate. Most of the time, the repayment will take most of the debtor’s income and cause more of a financial difficulty.
A third reason to avoid payday loans is that if the payment cannot be made there is the option of a rollover loan. This can turn the payday loan into a larger risk. A rollover loan can split the loan into payment installments. The high interest rate will continue and there will be late fees charged also. A rollover loan will sometimes take a long period of time to payoff the balance and can put a person deep into debt.
Most payday loans are obtained through an online process. This causes the person applying for the loan to have a security risk. It is required by each payday loan company to put bank account information, social security numbers, address information and other personal information on the World Wide Web. In some cases there will be the problem of identity theft if an unauthorized individual gets personal information.
The last and most detrimental reason to avoid a payday loan is the impact of the loan on a credit score. These loans are advertised as no credit check required and all that is needed is a checking account with a direct deposit. It is possible that if the payday loan is rejected that a credit score will be affected negatively.
All payday or no credit check loans lenders should be taken seriously. The reasons listed above are the top five reasons to avoid payday loans. Do not be drawn into a payday loan because of the easy access to money. These loans are a financial downfall and will not help in any situation. In most cases they will make the situation worse.
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