In recent months payday loans have frequently featured in the media. And this is seemingly for all the wrong reasons. Stories of people not being able to pay back their debt, of particular lenders using aggressive debt collection practices and of exponentially high interest rates plague people’s minds.
But wait. Is this a fair representation?
Payday loans have a purpose in the financial world.
As a type of short term loan, these cash advances are specifically designed to help people in need of quick cash to cover urgent, unexpected bills until they receive their next pay check.
This quick cash solution is often used by people who simply can’t make their money stretch any further, yet are faced with a financial burden that they need to pay immediately.
A major issue facing payday lenders is the question of morality. But people often forget that responsible lending works both ways.
The lender has an obligation to provide an honest, transparent and reliable service, while the borrower has a duty to meet their agreement and repay the debt in full on the agreed date.
If both parties meet their responsibilities, a payday loan, like any loan, is a useful financial aid.
Haste is the main advantage
The main benefit of a payday loan is its speed.
Compared with a long-term debt, payday loans don’t require you to meet such rigorous lending criteria, can be given out on the day and are only a small manageable amount. The repayment date is usually set about a fortnight after you receive the funds, but with one, small payment, the debt can be repaid.
As long as you manage the debt, a payday loan won’t hang over your head like a large, long-term loan will.
Would you rather an overdraft?
A short term loan can be a sensible alternative to running up a large bank overdraft.
Your bank usually has a credit limit on your card meaning that is the point at which you are supposed to stop spending on your credit card. If you overdraw past this monetary point, your bank will charge you considerable fees and possibly apply a higher interest rate.
For some people, using a payday loan instead of overdrawing on your credit card ends up being cheaper.
An alternative to bank loans
Banks are notoriously strict on lending. Since the financial crisis started in 2008, banks have harshly tightened their lending criteria and a lot of people simply don’t meet their new standards for loans.
Banks expect borrowers to possess an extremely high credit rating, have a stable, full time job and in some cases, have collateral to put against their loan.
People who suddenly require a small loan don’t have months to spend building up their credit rating and attaining these other factors. A quick alternative to this is a short term, payday loan where the lending criteria is more lenient.