Payday loans have been criticized by many as a poor financial choice. These loans are also called Payroll Advances, Payroll Loans or Payroll Loans. Critics say the interest is too high and people can get into trouble once they start borrowing money that way. Both statements can be true, but they are not always true. Just like anything else in life, if someone chooses to misuse assistance or abuse the many other options they have that are normally good, things can still end badly!
Let’s address some of the concerns. The first concern is about high interest rates. It is true that the interest rates on these loans would seem astronomical compared to more traditional loan rates. But let’s take a closer look.
When a person gets a $100 payday loan and it costs them $20 to borrow it, many people criticize this as a scam and a form of predatory lending. They feel it is unfair to people who may not fully understand the costs involved in this type of unsecured loan. They might say that cash advance loans are too expensive compared to other loan products or services and that payday loans should be avoided.
Now when your auto mechanic is fixing your car and he asks for a part, what happens? Let’s say the part costs $100 wholesale to the mechanic and the suggested retail price of the part is $150, which he charges you. Now you only had this part in your possession for minutes or possibly hours, but you have still profited by double the amount from the Payroll Loan lender. The mechanic has minimal risk of the part failing and having to do the repair again free of charge. The payroll loan lender has taken a much higher risk by lending money to people other lenders would turn down.
Think about it for a moment. If the restaurant you and your family dined at last night ordered fresh food yesterday to prepare meals, and your meal cost $100 in raw ingredients, but then your bill was $150 (plus tip!), so why this despised practice? The restaurant only had possession of the food for a few hours before it was served, but was able to add the $50 in revenue to cover its costs and make a small profit.
Somehow, when other types of businesses make much higher revenues from the products or services they offer, most seem to think of it as free enterprise and it’s perfectly acceptable. Actually, it is! Our society depends on goods and services being provided to meet the needs and wants of the public and everyone knows that some money must be made at every level or no one would bother to do it! Essentially, we gladly pay because we have needs we can’t meet on our own!
Using this new found perspective, why should unsecured loan lenders do this for free? They have bills to pay and they also need to earn a bit of money, which is the same as any other form of trading. Due to the higher risk they take, they also need to cover their losses. Do you think you pay too little for insurance? Probably not. When insurance companies suffer large losses, they raise their rates to remain profitable. It is only part of the costs we pay, just like with short-term loans.
Now, the other thing that payday loans are often criticized for is the concern that once someone starts borrowing against their future earnings, they can get into financial trouble. If someone needs more money than they make, it’s hard to get back into good financial health. Once people start using credit to get the things they need, they can get into trouble when bills start to come due.
Hmm. Does this sound familiar to you? If someone sees the latest pair of fashion boots on the way home and it’s only $150, will they probably skip Starbucks one morning a week to save up for them? Will they save the $5 a week and wait 30 weeks to buy the boots for cash, after they go out of style? Or they’ll whip out their trusty credit card, run into the store, and get $150 plus tax, plus interest on the debt!
When you don’t want to cook, you go out to eat. But what if your budget included dinner at home? You rely on your credit card to pay for dinner. When you don’t have any extra money and you accidentally drop your smartphone and the screen breaks, you use your credit card. If you develop a strep throat and need to pay the doctor’s copay, or your dog needs to see the vet, or your car won’t pass inspection without new tires, or your kids need new shoes for school, use your credit card.
Using your credit card means you are borrowing against your future earnings. You are assuming that you will continue to earn enough money to pay off credit cards and interest, along with your normal living expenses. This is the way most of us live. We use credit to our advantage and realize there is a cost to doing so. We also use credit to help us achieve the quality of life we want to live, in addition to paying for the things we have to pay for.
For people who don’t have credit cards, and possibly have bad credit on top of that, a payday loan is probably one of your only options. Believe it or not, these people also have needs and wants. They are hungry, they need safe cars, they get sick, their children need shoes, etc. They simply can’t borrow against your future earnings the way you probably can.
Traditional lenders, especially in recent years, tend to want only lower-risk customers and are generally not interested in doing business with the typical salary loan applicant. The loan applicant needs a steady job and a bank account to qualify for this type of loan, and those two characteristics can help indicate that there’s a good chance the potential borrower is trying to do the right thing.
In short, these unsecured loans are not for everyone. However, for many hard-working people who need money and can’t turn to traditional lenders, a payday loan may be the perfect solution!