Payday Loans: Pros and Cons

Sunday, 19 August 2018 01:08


The payday loan is a financial instrument, which requires the precision and patience. There are cases, where short-term financing will provide short-time relief, but unfortunately will deepen the problem over time into downward dept spiral.

However, if the short-term financing is used in a right way – it provides more than a immediate relief. Typically, it should be used to save money from extra charges or overdue penalties. In specific cases, a short-term loan can be used to get the success from the rare opportunity or even leverage the revenue.

By all means, keep in mind, that payday loan should be paid back in a timely manner and in full.

PROS (3) The right instrument to score the opportunity or close the financial gap via quick and easy application process.

CONS (2) Has a higher interest rate and shouldn’t be used to pay another short-term loan, to avoid Debt Cycle.

PRO: The process is Quick & Easy

Business Loans and Long-term loans require a huge collateral and a good official Credit Rating. The main reason is due to the low interest rate and therefore the risk for the financial institution must be as low as the risk. As a result, sometimes decision makers hesitate during the approval process.

People and businesses without a good credit history, low house income, low credit rating or new to the business, have the lower chances of receiving a requested financial assistance from traditional banks. However, that’s exactly the place where short-term financial help plays in full power. Perhaps, due to this huge gap, created by unsatisfied applications for the financial help, there are so many different types of short-term loans present. Typically, short-term lenders have no interest in FICO Scores or insufficient credit history. All that’s important to them is the ability of the borrower to pay back the loan in a timely manner.

These days, the full application process for the short-term loan is very simple and normally requires 10-15 mins to complete the online application form. The relatively small amount of application information doesn’t require a lot of time for application review. Therefore, it normally takes less than 24 hours for the decision-making process on the lender side. In most cases, funds can be available the next day. In some cases, the review process can take multiple days.

CON: High risk of Downward Debt Spiral

Some people consider taking a new loan to pay off a previous loan. In some cases, it makes sense, for instance, if the overdue penalty for another financial service, such as a long-term loan, is bigger, than an interest of a short-term financial help. However, the idea to pay the another payday by taken a new short-loan is a typical mistake which is leading to the downward debt cycle. There is no benefit in this situation for any side. So, if you are going to apply for a short loan, please consider carefully. Ideally, the Loan should be used as an instrument to save money or even get more benefit from it, so there must be a very clear and rational reason for the loaner and paying another short-loan by taking a new one is definitely not one.

PRO: The right instrument to score the Opportunity

Sometimes people can expect the opportunity, for instance, during the Holiday season. This is the period of enormous discounts. In fact, during the Holiday Season – payday loans or short-term loans are in high demand. There are many opportunities to acquire something, so even counting high interest of the loan provided that it is paid back on time, it still may be cheaper than buying something at full retail price.

In other cases, opportunities are unexpected, especially for businesses. For instance, significant business growth normally requires a capital to support it. However, no-one can be insured and protected against the rapid growth, so the short-term financial assistance can be yet another option. Moreover, a business can potentially generate far more revenue when compared to the size of the short-term loan. It should be possible to pay the loan back in time and in full. Therefore, such cases fit the win-win case applicable for short-term financing.

CON: Higher Interest Rate

Higher risks = higher interest, lower risks = lower interest. Short-term lenders typically keep long records. If you have had a successful experience with one – you can expect some form of discount from this specific financial company as a repeat client. As a repeat client, they feel that their risk is lower due to the positive experience with you. Nevertheless, short-term financial help is the one of the riskiest options, so the rates are higher than for long-term loans. Therefore, if you would like to pay less – you have to consider a long-term loan. However, if you require money here and now – a short-term loan is the option for you. Just keep in mind – there must be a rational sense and a solid understanding and plan of how you are going to pay it back.

The opposite side of high risks and interests is an easy and rapid application approval process. Lenders are willing to accept such risks for a higher rate. But that’s the question for the applicant – are the loan terms acceptable or not?

For instance, in the case of business cashflow retail corporations normally have enough cash to solve any financial issue. However, consulting businesses or manufactures can have a higher multiplication rate for this financial or interest is far less than overdue payment penalties.

Even with businesses, there are other options besides loans to get the necessary funding. So payday loan is the financial instrument, which is requiring precision and responsibility.

PRO: Prompt closing of financial gaps

A typical reason why businesses apply for short-term financing is related to gaps in financial flows. This way they can promptly get the required capital to fix the gap in day-to-day financial operations.

The same issue is related to individuals and their families. The financial gap between payrolls can be an issue because of overdue penalties for bank services or home utilities. In many cases it is cheaper to apply for the short-term financing. Unfortunately, not everybody is informed about such option and many people are afraid of loans, so people are facing with additional charges.

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