There is an increase in the number of people who are turning to payday loans. This is partly influenced by the use of the internet of many lenders. They are going online now which is making it a lot easier for people to borrow money from them. A payday loan is a form of short term lending which is meant to remedy financial emergencies. Like any other financial product today, there are certain problems which can stem from its use.
A Brief History of Payday Loans
Cash advance lending is not something new. It has a long history and has existed in some form for as long as the salary system has been in existence. The basic idea behind it is that the regular payment of an employee is going to be used as a form of security for a loan.
Though borrowing while using one’s salary as security has been around for a long time, the payday lending that we now know today can trace its existence in the latter part of the 18th Century in the United States. That was the period of rapid industrialization of the country when factories for various industries were built all over the continent. While there were plenty of jobs for workers back then, they were not paid very well. A good illustration of that period is Upton Sinclair’s novel, “The Jungle.” This book portrayed the lives of immigrants who found work in the meat packing plants of Chicago.
Back then lenders would let workers borrow money from them. The workers could not borrow from banks back then and there were no credit cards. The other alternative would be to pawn something. Lenders resorted to heavy-handed ways in order to make the borrowers pay. The government turned a blind eye to the practice since it did serve a purpose.
That changed however in 1935 when a young man was beaten by enforcers outside his work for failure to make payments. The incident prompted an investigation which led to the tighter controls of payday lending.
Development to Online
The system of cash advance lending managed to stay and exist even during the periods when tighter controls were exercised on it. One huge blow to the lenders was when the interest rates for lending were regulated by the states. There were some states were the highest legal rate is so low that a lender would have to operate illegally, if it wanted to stay in business.
From the street lenders that lent money to workers, payday lenders started to setup shops. These offices were places where workers could walk in and borrow money. The processing there was a lot quicker as compared with traditional lenders, but things were bound to get faster with the introduction of a new technology.
This new technology is the use of the internet. Many cash advance lenders now operate through the use of the internet. They have a website which from which the borrowers can send in their application. This development is one of the reasons why payday lending is becoming even more popular than ever.
Uses of Payday Loans Online
Loans can be used for different purposes. One of the good qualities of cash advance lending is that the money borrowed through it can be used for anything. There are no restrictions as to how it would be used. So it can be a means of meeting any financial emergency that could come up. Here are some of the uses for payday loans.
Emergency Medical Expenses
Emergency medical expenses cannot wait. It would have to be covered right away and that is where cash advance loans can come in real handy.
Bills to Become Due
Rather than incur late fees or being disconnected from the service because of unpaid bills, it would be better to get a payday loan. The inconvenience caused by having an unpaid bill is too much.
Cash advance loans are really not meant to pay and buy the basic necessities, but it can be used as a last resort. It can be a means of bridging the periods between the paychecks.
Qualities of Payday Loans
There is a lot of talk right now as to whether payday loans are beneficial or harmful to consumers. Both sides of this argument have a lot going for them. Cash advance loans have good and bad qualities and it is useful to know those qualities before deciding on whether it is ultimately or not.
Positive Qualities of Payday Loans
As you might have guessed, payday lending has many good qualities that make it attractive to a lot of consumers. Here are some of those qualities:
- No Documentation
- No Credit Checks
We have gone through the history of payday lending and we have seen how it has progressed from being a storefront operation to being an online system. The borrowing system being online means a lot to the borrowers, because it can be done anytime without having to physically go to the office of the lender. That makes it very convenient for them. The application can be done from home or even at work. Because it is done through the internet, the processing can be done in a matter of hours. You cannot expect that kind of speed with the processing of the more traditional loans.
Short term lenders now have come up with other ways of verifying the information that you provide on your application. Most of these lenders would not require any kind of documentation from the borrower. All that they would be asking are some important pieces of information that they would need in checking.
Another huge attraction for many borrowers is the fact that there are no credit checks now involved with cash advance loans. Even those with very bad credit standings can borrow.
Negative Qualities of Payday Loans
All the positive qualities of payday loans would have to be considered in the light of the negative qualities. All the great things about it, the speed of processing, the lack of requirements and the convenience that it offers have a price. That price comes in the form of a very high interest rate.
The APR or the annual percentage rate of a typical payday loan could be as high as 300%. You might not think of it that way since the interest that is usually quoted are for short terms only. But this high interest is what could lead to trouble in the long run. In the end, borrowers are unable to pay their loan on the set date since it is usually too soon. In other cases, they could end up using their whole pay check to pay for the loan and not have anything left for the other expenses.
This leads to the second negative quality of cash advance loans and that is it poses a huge risk for the borrower. The risk is in falling into a cycle of debt. This can happen because there are no restrictions as to how many times a person can borrow from payday lenders. When a borrower finds it hard to make payments for his/her loan, which happens quite often, the only recourse that they can turn to is to borrow again. This can go on and on until the borrower falls into so much debt. Many borrowers have fallen into financial ruin because of this vicious cycle of debt.
Alternatives to Payday Loans
Financial experts are recommending that consumers turn to other means of obtaining money before they resort to cash advance loans. You can borrow from your friends and families for example. Personal loans would be a lot better since you can come up with agreements on when the amount would be paid that would be more favourable to you.
If you can’t borrow from anyone that you know, then you can try raising the amount that you need by selling things that you are no longer using. That would be a great move since you won’t end up owing anything. You can also try borrowing from traditional lenders like banks. The application period might be a lot longer, but the terms that you would be getting from them are not so hard and the interests are not so high. If your need for cash is not that urgent then it might make sense to turn to banks. They are starting to offer short term loans too.
Should You Use a Payday Loan?
The question now is whether you should use a payday loan? The best move would be not to. You should resort to the alternatives that we have mentioned or any other means of raising money that you can think of. But if all of the options that we have given didn’t work out and your need for cash is really pressing, then you might have no choice but to take out a cash advance loan. In that case, you should be aware of what you are getting into and be ready to pay it back as soon as you can.