Before understanding the reasons for people choosing payday loans it is important to know the true meaning of payday loans. A payday loan is short-term borrowing, considering it a loan or credit based on the borrower’s earning. The interest rate on a payday loan is on the higher side as it is provided immediately. It is also known as cash advance loan. The repayment of a payday loan as its name suggests is due on the payday of the borrower or near the payday, it does work as a facility in times of need. It can be obtained from any credit lender like banks, private credit merchants or online credit providers.
How does it work?
There are different regulations in different States and functions accordingly. The laws decide the amount of borrowing, the fees and interest rate lenders can charge on the payday loans. To apply, there are high chances of providing a pay stub by the borrower to acquire a payday loan as it is based on it. After the approval, the lender provides cash, cheque or direct deposit into the borrower’s account. Usually, the repayment time is of two weeks or by the next payday and a full principal amount along with the interest has to be paid.
Reasons for choosing Payday loans
Although a payday loan is an expensive method of obtaining credit, it raises finance quickly than any other way and helps in paying for expenses like bills or other miscellaneous expenses without compromising on the credit score. It is a loan that is valid for a few weeks and saves the penalties on late payment. Few benefits attract borrowers towards payday loans.
- The access to payday loans is almost instant as applications are approved immediately by the lenders due to high competition if the necessary information is provided correctly. Some lenders process the application exactly at that moment and provide a loan on the same day or the following day that is quicker than any other conventional loan or credit card.
- A payday loan requires minimal or no paperwork as the process of obtaining a payday loan is very convenient. It does not require booking an appointment with the loan officer, waiting for a response or submitting loads of paper. It is applied online and instant feedback is received by the lenders as the loan is received in a cash form it makes it more advantageous over conventional loans that are specific or credit cards that limit the spending.
- Conventional loans and credit cards require many proofs, documents, and collateral requirements to qualify for the loan whereas payday loans need only proof of income. The current financial position of a borrower is more important than credit score or rating and even with a bad credit rating payday loan can be lent. Only a stable income and ability to pay loan back matters in a payday loan.
- As payday loans depend on the income, therefore, the amount of borrowing is limited to that and the abiding laws in the State. However, good repaying behavior can enable borrowers for higher amounts.
- It is very unlikely that a payday loan hurts the credit rating or credit score of a borrower as it is a short-term loan and must be paid within weeks. In instances of credit cards and conventional loans, the period is lengthy and filled with uncertainties that can damage the credit rating.