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1) Avoiding embarrassment: Many people find borrowing money as an embarrassment and hence avoid asking family and friends to lend them money. Though this could be the easiest option, it may not always work out.
2) Adults and Payday Loans: Adults who have started earning recently or have started a new family may find themselves in a situation where they might need a loan to fulfill the sudden expenses. Usually, they are not very keen on saving or planning the finances in advance. Referring to personal finance lessons for adults might be helpful in situations where they are not sure how to get out of the payday loans.
3) Canceling debt: Many people take payday loans to clear out the earlier loans. Payday loans are instant and may not need detailed paperwork compared to another type of loans hence it is an easy option to repay any other loans.
4) Holidays and Festivities: Every year during Christmas a lot of people take out payday loans to buy festive items, gifts, and food articles hoping they can repay it back in New Year.
5) Bad credit score: One of the most important reasons for opting for a Payday loan is that many people have a bad credit score due to the past loans and hence it is difficult to get the loans from banks and other similar institutes.
6) Fulfilling basic needs: People even take payday loans to fulfill the basic needs like putting food on the table. If the borrower is not planning his finance correctly or in already having a lot of debt, he might struggle to satisfy his families' basic needs forcing him to go for more debt.
7) Unemployment: Unemployment is also one of the biggest problems the world is facing. So if someone is not earning any money at the end of the month it can be very difficult for them to meet the ends, forcing them to choose for the options like these loans.
8) Medical Emergency: There could many unseen medical issues one might be facing. The medical expenses are growing up day by day and not everyone has the back up of insurances.
Payday loans can prove beneficial as they are one of the ways to get fast money when needed. The fast access encourages many people to borrow money, sometimes even when it is not absolutely necessary. Payday loans can put borrowers in serious debt situations and it can become quite challenging to come out. Hence before going to payday loans, it is important to understand its advantages and disadvantages.
Advantages of Payday loans:
1) Available when no other option is there: Payday loans are available when there is no other option but to take a loan.
2) Easy access: Payday loans do not need credit verifications and can be obtained with minimum paperwork as the identification proof, salary or account summary and so. Banks and other financial institutes, on the other hand, might need a lot of documents and verifications before approving the loan and also need more time compared to the payday loans.
3) Fast and handy: Payday loans can be often applied online or sometimes even by directly visiting the loan providers. They need very less documentation and verification and hence can be approved within a few hours to days.
Disadvantages of Payday loans:
1) Higher interest rates: Payday loans are easily available because of the higher interest rates. Banks and other institutes have to follow many rules and regulations, the interest rates are not much higher and controlled by the governing institutes. The small merchants and payday loan providers are exempted from many laws and hence can charge very high-interest rates. Sometimes the interest can go as high as 500%.
2) A vicious cycle: Payday loans are difficult to pay back as the interest rate is too high. Sometimes the borrowers may not be able to pay back the loan at a pre-decided time causing it to roll over with additional charges. This adds up a significant amount to the existing loan value making it tougher to repay. Payday loan borrowers often find themselves stuck in a non ending vicious cycle.
3) Deception by the money lenders: The institutes or merchants that lend money in the form of payday loans can make the contracts deceptive as they are aware of the fact that the borrowers may not be able to defend themselves legally. There is very less control over what additional charges and interest rates will be charged which enables the money lenders to impose unexplained charges in the contract.
4) Temporary solution: Payday loan may not be the right solution if the borrower is also in debt. A payday loan is often helpful for a one-time need. But it may not solve the underlying problem and in fact, may be more harmful to the borrower. The borrower must focus on solving the problem instead of finding a temporary solution which might add to more trouble in long run.