The Workings of Payday Loans: What’s Fact and What’s Fiction

For so long, people have viewed payday loans as these debt traps that send people deeper into debt than they originally started out. Well, that’s because when you take out a payday loan or any type of loan, you’re essentially borrowing money that you don’t have, right? Yes, and everybody has taken out a loan at some point in their life so what makes a payday loan so horrible in comparison to a regular loan? Well, let’s first get to the basics of a payday loan and its purpose.

 

What is a Payday Loan and Its Purpose?

Payday loans are short-term loans of small amounts where the repayment terms are based on when you get paid. With these loans, the interest rates tend to be much higher than that of a traditional personal loan.

The purpose of a payday loan is to help those who have an urgent financial need to get the money they need, fast. In knowing what a payday loan is and its purpose, you’re probably wondering what does what you spend the money on having to do with falling into a debt trap. Well, it has a lot to do with it. It has to do with being a responsible borrower.

With payday loans, there’s no credit check involved, the approval process is easy, and you can get the money you need the very same day… just look at how easy the process is. Why would you think a financial establishment would make money so easily available like that? Because it’s for emergencies.

When you have a financial emergency, you’re not trying to wait a few days to get the money… you need it right then! But emergencies never come at a “good” time, do they? No. They typically happen in between pay periods, so what’s the financial option that is easy with no hassle? Payday loans. It’s people who misuse the loans who tend to fall into the “trap.”

 

What’s the Payday Loan “Trap?”

The payday loan “trap” is where you take out a payday loan but don’t ever have enough money to pay the loan off. A lot of the times, if people were to pay the loan off right then, they wouldn’t have enough money to get them through to their next pay period, so instead of paying it off, they’ll just renew the loan for an additional fee.

If you think about it, it makes complete sense why people would renew. There are so many jobs in the world today but you would think that because of job growth, wages would grow too… but that’s not the case in our economic world… job growth no longer induces wage growth. That’s why people need extra financial help when emergencies arise.

 

How Can You Avoid the “Trap?”

The payday loan “trap” is something that people deem as a vicious cycle. But what people fail to realize is that it’s completely avoidable. If you are a responsible borrower and clearly understand the terms of your agreement, you won’t fall into the “trap.”

 

Utilize Payday Loans For Emergencies Only

Because of the ease and convenience of payday loans, they should only be used for emergencies when you need money fast. Maybe you need a car repair or your refrigerator went out and you need a new one… those are both emergencies that are pivotal to the functioning of your daily life. You need to get your car repaired so that you can get back and forth to work. You need a new refrigerator to keep food stored safely in your home.

In your mind, you might be thinking, “if you have an emergency come up, why not just take money from your savings account to pay for it?” Well, the reality behind that logic is that people don’t have enough money saved up for emergencies. In fact, according to CNN, one in four Americans have no emergency funds saved up. That reason alone is why payday loans are so helpful to people in their times of need.

 

Find a Trusted Payday Loan Company to Do Business With

A lot of the times, when people opt for payday loan companies, they’ll do a basic Google search of payday loan companies and go with the first one they see. They won’t even take the time out to do any research on that particular company.

Before you take out a payday loan, whether you do it online or in-person, always do your research, especially when looking online. If you’re unsure of how to go about searching, here is a list of trusted and reputable payday loan companies.

When you get your payday loan services from a trusted and reputable company, they’re going to lay everything out there for you. They’re going to make the terms of your agreement clear and easy to understand and if you opt for an online company, they’re going to have a contact number for you to call to speak with someone to help you better understand how the loan works.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.