Payday loans have been in the spotlight a few times over the years for very different reasons and people have generally had mixed feelings about them because of the bad reputation that some loan providers’ activity has created. What’s the truth about payday loans though? Can they be used responsibly and effectively by people or are they a risky business? It all depends on who is using them.
What are they and how do they work?
Typically payday loans are short-term financial arrangements that you can opt into if you have gone through an unexpected situation that requires money you hadn’t set aside and need an emergency loan. They are based on the principle that you borrow a relatively small amount and pay it back shortly, usually at the time of your next payday.
The criticism that some payday loan providers have faced is mostly centered round the high interest rates that these types of loans usually have. However the counterargument made was that those rates are not meant to be calculated on an annual basis since payday loans are not annual loans and people usually take them out for a period of a few weeks.
Are there risks?
Can it actually be risky to take out payday loans because of these high interest rates? Well, that depends on how responsible you are with your finances and how well you plan your payments. Most of the people that report paying insanely high interest rates are the ones that do not manage to pay back their loans in time.
That is because of how the payday loan system works: the applicant chooses the amount of money that he needs to borrow and the period of time over which he can pay it back. If the applicant fails to repay the sum he owes he will be charged and interest for late payment.
The risk comes in when this increasingly high interest is left unmanaged and adds up to a higher amount that becomes more difficult to pay back. Applicants can sometimes extend their loan periods or take out a second loan to pay back the original one which means that it will take more time for them to pay it off and that they will end up paying more than they have originally planned in order to become debt free.
How do I avoid the risks?
The problem with payday loans is that they are very easily accessible and very quick. People consider payday loans as an easy way to get some emergency cash fast and with a minimum of effort and don’t pause to think about their financial situation. The best way to use any kind of financial product from long-term loans to payday loans and credit cards is to do your research first and consider the pros and cons to figure out whether that product works well for you or not.
You can use payday loans safely as long as you do your research first. Find out what interest rates each provider charges and apply for the services of the ones that charge les or have better payback plans and structures.
Then crunch some numbers before you actually take the loan out and come up with an option that works for you. Think about the amount you are borrowing, what you need it for, the urgency with which you need it and how having to pay back the total amount will affect your finances the following month.
If you are responsible with your finances and usually know how to balance your check book there should be no complications when getting a payday loan because you’d be able to calculate how much money you would need to pay back and how to make it available at the right time. When you are sure that you will be able to pay the loan back by the time it is due, there is no risk in accruing massive interest. So if you want to take out a payday loan for an emergency it can be risk free as long and you’ve thought it through and planned your finances for the month to come accordingly.