What Are The Disadvantages Of A Payday Loan?

Payday loans are a type of short-term credit which is issued against an individuals forthcoming paycheck. These types of loans are good during emergency situations where a small amount may only be required for a limited period of time. It is also convenient that payday loans do not require collateral such as an automobile which is often required for title loans. While payday loans can come in handy, they are often fraught with many disadvantages and can lead to serious financial consequences is not properly understood.

Because a payday loan is considered a short-term emergency obligation which is normally applied against a forthcoming paycheck it means it would need to be repaid in an extremely short amount of time. If this can be done, then in most situations it may work out. Unfortunately, day-to-day living can be less accommodating and an unexpected expense could pop up before that next paycheck is received which could limit an individual's ability to repay the loan. If that should happen, then it can get really expensive as penalties and fees kick in the longer the loan is not repaid.

Payday loans can also have exorbitant interest rates of up to 120% on an annual basis. What this means is that for a loan amount of $300 at 10% interest you wind up paying $30 in addition to the principal borrowed when the loan is repaid. While this may not sound like much because 10% interest sounds low this can be for as little as two weeks to 30 days. That is a lot of interest for such a short period. That $30 could easily go to a water bill or gas in the car as opposed to a payday loan lender.

Also, to prevent various types of fraud from people trying to cash fake payroll checks, many payday loan operators require a valid checking account against which a post dated check can be written. If the borrower goes past the repayment date then the post dated check could be cashed which could create even more problems with insufficient funds or overdraft fees from your bank. Without a checking account it may be impossible even to obtain a payday loan.

Most payday loan companies also require proof of employment such as one or more pay stubs. If you just started a new job or are self-employed then it could be next to impossible to obtain a payday loan so keep this in mind in case of emergencies. In these circumstances a title loan might be the only viable option assuming you own an automobile and are willing to risk losing your vehicle.

A payday loan by definition is tied to and based off of your income from employment. This is important to remember because if you make $500 a week than most payday loan companies will only let you borrow a certain percentage of that $500. Many states regulate this amount by determining what percentage a person would reasonably be able to repay during a certain amount of time. This specifically is meant to prevent individuals from borrowing more than they earn and then trying to stretch a loan out over multiple paychecks which can become untenable in very short order.

While failure to repay an outstanding loan will not lead to criminal prosecution there are other legal considerations when taking out a payday loan. First and foremost, as with any civil procedure, you can be sued by the lender and taken to court. This can of course lead other complications because now it can become public knowledge as it is a civil matter and outstanding debt could be reported to the three major credit bureaus which might negatively affect obtaining other loans or employment.

There are many disadvantages when it comes to payday loans which make them usually an option of last resort for most individuals. This doesn't mean that they shouldn't be used in certain dire circumstances where funds are needed immediately and this is the only viable option. However, care should be taken when receiving a payday loan. Understanding these disadvantages will hopefully help you avoid any complications or unexpected fees which may arise should you be unable to repay the loan under the terms which were agreed upon.