Payday Loan – Pros and Cons

A payday loan denotes a loan with a short repayment term and small amount that is offered to the consumers in the interval of paydays to assist them to successfully deal with financial troubles throughout that phase. These loans are also termed as cash advances or paycheck advances and usually restricted to an amount of $1,500.

Of late, payday loans have created a considerable degree of debate. Critics argue that payday loans aim the low income groups and the young and underprivileged people who do not realize the value of money. Frequently, critics have equated payday loan lenders to loan sharks since they charge extremely high rates of interest for providing the loans. Typically, a payday loan lender levies any rate starting from 250% and higher for the loan. The underprivileged and young people of the society pay a much higher interest rate on hire purchase agreements and payday loans in comparison to the middle level income group who pay interest of around 25% on credit cards.

On the contrary, those who advocate payday loans debate that payday loans fill a vacuum that the national banks are not able to do. They also claim that the processing costs of a payday loan are not more in comparison to that of other high value loans with extensive repayment terms. In addition, advocates of payday loans contend that the payday loan interest is less than the late fees of a credit card or the expenses of a check bounce.

They state that conventional payday loan interests do not yield material gain. The Federal Reserve Bank of New York published a testimony on payday loans which mentioned that payday loans compensate for the deficit of household cash flow in the interval of paychecks and support the welfare of families who obtain payday loans. This report also stated that families normally acquired payday loans for emergency purposes like making payments for utilities and foodstuff.

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