Payday Loans have been criticized by many as a poor financial choice. These loans are also called Payday Advances, Salary Loans or Payroll Loans. Critics say that the interest is very high and that people can get into trouble once they begin to borrow money that way. Both of those statements can be true, but are not always the case. Just like anything else in life, if someone chooses to misuse assistance or abuse many other options that they have that normally are good, things can still end up to be bad!
Let's address some of the concerns. The first concern is about the high rates of interest. It is true that the Interest Rates on these loans would seem astronomical compared to most 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 would criticize that this is a rip off and that it is a form of predatory lending. They feel that 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 when 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 orders a part for you, what happens? Let's say that the part costs $100 wholesale to the mechanic and that the suggested retail price of the part is $150, which he charges you. Now he only had this part in his possession for minutes or possibly hours, but he still has profited by twice the amount of the Payroll Loan lender. The mechanic is taking a minimal risk that the part fails and he has to do the repair again at no charge. The Payroll Loan lender has taken a much greater risk by lending money to people whom other lenders would turn away.
Think about it for a moment. If the restaurant that you and you family had dinner at last night ordered fresh food during the day yesterday to prepare meals, and your meal cost them $100 in raw food ingredients, but then your bill came to $150 (plus tip!) then why is this practice looked down upon? The restaurant only had possession of the food for a few hours before serving, yet they could add the $50 of revenue to cover their costs and make a little profit.
Somehow, when other types of business make much greater revenue on the products or services that they deliver, it just seems to be considered by most to be free enterprise and is perfectly acceptable. In reality, it is! Our society depends on goods and services being provided to fill the needs and wants of the public and everyone knows that some money must be made at each level or no one would bother doing it! Essentially, we gladly pay because we have needs that we can't fulfill on our own!
Using this new found perspective, why should Unsecured Loan Lenders do this for Free? They have bills to pay and need to make a little money too, which is the same as any other form of commerce. Because of the higher risk that they take, they also need to cover their losses. Do you think you pay too little for insurance? Probably not. When insurance companies sustain huge losses, they increase their rates to stay profitable. It is just part of the costs we pay, just like it is with short term Loans.
Now the other thing that Payday Loans are often criticized because of is the concern that once someone begins to borrow against their future earnings, they can get into financial trouble. If someone needs more money than they make, it is difficult to get back to good financial health. Once people start using credit to get things they need, they can get in trouble when the bills start to come due.
Hmmm. Does this sound familiar? If someone sees the latest fashionable pair of boots on their way home and it only costs $150, will they likely skip Starbucks one morning a week to save up to buy them? Will they save the $5 per week and wait 30 weeks to buy the boots with cash, after they go out of style? Or will they pull out their trusty credit card, run into the store and come out $150 plus tax, plus interest in 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 smart phone, and the display breaks, you use your credit card. If you develop a throat infection and need to pay the doctor's co-pay, or your dog needs to see the vet, or your car won't pass inspection without new tires or your children need new shoes for school, you use your credit card.
Using your credit card means you are borrowing against your future earnings. You are assuming that you will continue to make enough money to pay back the credit cards and the interest, along with your normal living expenses. This is the way most of us live. We use credit to our advantage and realize that there is a cost for doing that. We also use credit to help us achieve the quality of life that we want to live, along with paying for things that we have to pay for.
For people without credit cards, and possibly have poor credit on top of that, a Payroll Loan is likely one of their only options. Believe it or not, these folks have needs and wants too. They get hungry, they need to have safe cars, they get sick, their kids needs shoes and so on. They just can't borrow against their future earnings the way you probably can.
Traditional lenders, especially in recent years, tend to only want the lowest risk customers and generally are not interested in doing business with the typical applicant for a Salary Loan. The loan applicant needs a steady job and a bank account to qualify for this type of loan, and those two characteristics may help to indicate that there is a good chance that the potential borrower is trying to do the right thing.
In summary, these unsecured loans are not for everyone. However, for many hardworking people who need money and cannot turn to traditional lenders, a Payday Loan may be the perfect solution!