We all know how tough it can be to manage expenses in this downward spiralling economy and no matter how much you earn; a significantly high percentage of your income is wasted covering up your expenses. If that is not bad, then imagine with each passing year, your real income is taking a hit and decreasing steadily while the expenses are ever rising. And when lady luck is not by your side, things sometimes tend to get worse. Let’s say a financial emergency strikes, and you land yourself in a hot situation with a shortage of cash while facing a cash crunch and that your current income is unable to sustain and bear the brunt of your huge utility bills and the ever-lasting debts and mortgages, then what do you do?
In a situation like these where you need to borrow money and without the availability of any emergency loans, you find yourself in a situation where you are out of options, so what do you do? In a situation like these, it is best that you opt for a payday loan.
So, what is a payday loan?
A payday loan or cash advances are a type of a short-term loan where borrower borrows money for a short duration usually up to two or three weeks. These loans have a simple structure and offer short term, low balance borrowings. They are easy and simple to understand and provide quick credit until your next payday.
The flips side of all this is that they charge exponentially high-interest rates and have hidden provisions such as added fees and other charges, which most of the borrowers at the time of the borrowing are not aware of. And because of all this, they are sometimes referred to as predatory loans.
So, before you make a decision on whether to opt for such loans, here are a few take away which you should keep in your mind.
1. Your Financial Situation
It is essential that before you opt for a loan, you should be aware of your financial situation. You need to be honest with yourself and decide where you are standing right now and that whether you will be able to squeeze your finances without going for it. In case if it is not possible and you need it to survive, then you need to consider and asses the total costs and benefits of this loan. And in the scenario that if the total benefits outweigh the total costs, then you should opt for it otherwise not. Another factor that you need to cater in is the future obligations and requirements that you would need to fulfil and that whether you can fulfil them without paying a huge penalty or not.
2. Legislations in the Country
One of the main reason why these payday loans have such high-interest rates is that they are unsecured loans, meaning that they have no collateral or any other asset secured against it and in case of a default the owner has no means to recover his losses. As such in a country where the economy is very volatile and fluctuating, these lenders can charge interest rates which are no less than extortions and without government or a central body regulating them, they can do as they please. And in such cases, they can hamper or slow down the economic activity as entrepreneurs or young vendors who are starting out new and are in need of cash, may not approach them or if they do, they drastically reduce their chances of success.
So, it is important that the government brings in legislation and controls to stop these lenders from charging abnormal profits and stopping the economic progress.
3. Financial Knowledge
Before you commit yourself to the payday loans, it is important for you to know what you are delving into. Although the terms and the conditions of the agreement may be simple, there are many hidden provisions and costs which cannot be easily seen by the ordinary borrower. And since these extra added costs and hidden charges are usually rugged under the carpet and are not openly stated in the agreement, they sometimes can be really shocking and can hurt the finances of the borrower. As such, it is crucial that you refresh your financial knowledge before you sign the agreement and are aware of these extra and hidden charges.
If you feel that you lack financial knowledge and expertise, then you always take the help of someone who does have on-ground expertise in finance.
4. Finding the Rate of Return
Another benefit of having financial knowledge is that you are aware of all costs and benefits. So, before you opt for a loan, you need to be aware of its rate of return and whether it will be beneficial for you or not. The rate of return would give you a guideline as to whether you need to proceed with the short term borrowing or not. It also helps you determine your tangible benefits and supports you with budgeting as well.
There are different methods to calculate it and however, the most widely used method to find the Rate of Return is through Capital Asset Pricing Model. This is a simple yet broadly popular and effective method which can help you quantify the risk, analyze the data and determine the feasibility of the loans.
5. Eligibility criteria
Just like other forms of borrowing, there are set criteria and a process for payday loans as well. Unlike the bank loans, here the process is not so rigid, strict or time taking. In fact, it is quite fast and quick where you will be given credit the same day if you meet the criteria. The criteria for approval is that you should be an adult and above the age of 18 and a legal citizen of your country. The second thing they would consider is your employment status and credit history. It helps if you have a good credit record and checking account. Your employment status helps the lender in determining your repayment policy. Only if you have met these conditions would you be able to apply for the loan and get it approved.
A payday loan is one fast track way for you to get short term loan without too much hassle. Although people tend to lose the plot where they do reckless borrowings from unscrupulous websites or lenders without any research or on minimal information. Before you commit to any borrowing, research first, find different lenders, learn different rates they are offering and find out if there any hidden charges, so that you can get the best deal for yourself.