Payday Loans – The Positive Spin on Negative Views
While advocates of payday loans say they grant loan access to people with poor or no credit, critics say these “short term” loans unfairly target minority populations and trap people into lengthy debt cycles.
What is the truth? Here’s a breakdown to help you figure things out for yourself. In this article, we’ll explore what a payday loan is and how it works, differences from state to state, some pros and cons of payday loans, and some responsible alternatives to payday lending.
What is a payday loan and how does it work?
A typical payday loan is a small-dollar loan (usually about $100-$1,500) with a two-week term that is due in a single lump payment on your next payday. At least, that’s how it works in theory.
These loans target people with poor or no credit who need access to cash immediately. But if you have bad credit or no credit, there’s not a lot of other options to access fast loans for emergencies?
They’re easy to access
The number one advantage of payday loans is that they’re easy to access. In fact, many cash advance lenders promise access to cash within 24 hours and an immediate lending decision. Some are even available 24 hours a day, 7 days a week and have online applications. Most lenders who have online applications typically encrypt their forms to keep your information secure.
Unlike traditional loans, which can take time to apply for, these loan applications can take as little as five minutes.
They have fewer requirements than other loans
Traditional lenders usually require a Social Security number, photo ID, proof of income, a credit check and will verify your ability to repay a loan. Unlike traditional personal loans, most “fast cash” loans have fewer requirements to apply.
Generally, all you need to apply for a payday loan is to:
- Be at least 18 years of age
- Have a government-issued ID or Social Security number
- Have a regular job or other regular source of income
- Have an active bank account
- Not be apart of any active military
While having fewer requirements makes getting cash more convenient, keep in mind that the additional requirements from banks and other lenders were often put in place to help protect you.
All Credit Types Are Accepted
Unlike traditional loans where you need good credit to be approved, payday loans don’t require a credit history. Since they don’t pull your credit, that also means no hard credit inquiry, which can lower your credit score by several points.
Except in rare cases, however, payday loans won’t help build the credit you need to move onto higher quality financial products in the future.
If you do experience bad credit, and won’t be able to improve it for a while, there are sites dedicated to services Bad Credit Loan in the USA.
Learn how to build credit with credit cards by reading our post on “How to Build (or Rebuild) Credit.”
It’s an unsecured loan
Unlike a car title loan, traditional auto loan or mortgage, payday loans are not secured by personal property. This means that if you default (don’t pay), the lender can’t seize your property as a consequence.
While not secured, payday lenders often have access to your bank account as a condition of the loan, which is a different type of risk. They can also take other measures, such as sending your debt to collections or taking you to court over outstanding balances.
Due to having no collateral, it often imposes higher risk to those lenders, yielding higher APR’s as well.
Are these loans considered predatory?
While most people think that these loans are predatory and target the minority class of Latinos and poorer black communities, we do not believe this to be ALWAYS true. Whether or not the short term lenders are marketing at all, there will always be a demand for these types of loans. The reason for the high demand is due of how fast they receive the loan, as well as not needing good credit to get approved for one. Unlike traditional loans from a bank, the lenders do not ask for any collateral either. This means that the lenders typically take high risk in receiving the funds back, which is the cause for the high APR rates.
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