6 Common Misconceptions About Small Payday Loans

Payday loans are often considered a synonym for predatory lending. This makes them an unpopular financial option that people try to avoid. Most individuals are sure that getting a payday loan is a bad decision that will result in getting into a debt trap. The truth is that any loan can be both a good and a bad option. The way you use it is the major factor that determines its utility.

Let's find out what are the common payday loan misconceptions and try to explore the 6 most popular myths about this form of borrowing.

What Is a Payday Loan?

A payday loan is a form of short-term debt that often comes with high interest rates. Payday loans are designed to help people overcome financial emergencies and unexpected expenses. As their repayment terms are typically limited to 2 to 4 weeks, loan amounts available are also small. You can borrow up to $1,000, with some states capping maximum sums at $300 or $500.

Payday loans are known for being easy to get. They have a simple and often online application process, fast loan processing and funding times, and very relaxed eligibility requirements. People who were turned down by traditional lenders can usually get payday loans without much effort.

However, payday loans are more expensive than traditional loan options. Due to their high interest and short repayment terms, they are banned in some states. A total of 16 states and Washington D.C. have banned payday loans in their territory.

Misconception 1: Payday loans are only for the poor and financially illiterate

Even if you manage your finances well and have a budget that you stick to, financial emergencies can still arise. Those who can cover all their regular expenses from their paychecks don't necessarily have money at the moment when unexpected expenses arise. This way, short-term loans can help them get back on track and don't let the problem grow bigger.

More than that, payday loans are transferred extremely fast, making them a more attractive option in situations when time matters. Thus, they can be a great solution for financially literate people with stable incomes who need money quickly.

Misconception 2: Payday loans are always a bad financial decision

Payday loans are not pure evil. The fact that they are more favorable to a lender doesn't make them a bad decision. All lenders earn interest from loans they give to individuals, but whether they are a good or bad decision depends on the loan's purpose and the way you use the money. Just develop a clear repayment plan before obtaining a short-term loan, or any loan for that matter.

Payday loans can be lifesaving and even beneficial to a borrower, provided that they use them wisely. For example, getting a $600 loan online can prevent you from paying high fees that can be charged if you miss your credit card payment. If you run out of money because of emergencies, you can also use the funds to pay rent or utility bills.

Also, they can help you when you have reached your credit limit and have no other means or sources to cover unexpected costs. Sometimes it's better to get a short-term loan than to let your problems snowball.

Misconception 3: Payday lenders are predatory and take advantage of vulnerable borrowers

It's a well-known fact that payday loans come with higher interest rates compared to conventional options. But it doesn't make them predatory. A high interest rate is the price that a borrower pays for their speed and convenience. Also, they are available for people with bad credit, so lenders try to offset the risks of losing their money.

However, payday loans will not rip you off if you deal with the right lender. As the industry is evolving and new lenders appear, they compete with each other to try to offer the more favorable conditions.

Also, reputable lenders always check a borrower's ability to repay the funds. Keep in mind that they are more likely to reject a customer who is insolvent. This is made in order to prevent an individual to make their financial situation even worse.

Misconception 4: Payday loans trap borrowers in a cycle of debt

It's true that 1 in 5 payday loan borrowers default on their loans, while nearly 80% of all borrowers keep rolling them over. However, having a clear repayment plan and understanding the terms will prevent you from becoming part of this statistic. Of course, you should not take out a payday loan if you don't have a clear understanding of how you will pay it off. Also, try to refrain from taking out a short-term loan if your income is unstable and may fluctuate.

If you have a stable source of income and know for sure that you can afford to repay the funds without delays, a payday loan is safe for you. Just pick the right lender and stick to your repayment schedule to avoid late fees and rollovers.

Misconception 5: Payday loans are the only option for borrowers with poor credit

People with bad and poor credit often think they are limited to just one option. But it's not true. Besides payday loans, there are other financial products available that can offer a similar outcome. For example, one can look to borrow money from other individuals through peer-to-peer platforms, use cash advance apps, borrow from family or friends, or request a paycheck cash advance from an employer.

Additionally, if a bad credit borrower has a credit union membership, they can inquire about payday alternative loans (PADs) that some credit unions offer. These loans work similarly to regular payday loans but offer more flexibility. They have longer terms to make them easier to repay. Also, they come with lower interest rates that are capped at 28% APR.

More than that, if you own some valuable property, you can consider secured personal loans. They have more relaxed requirements as a borrower provides security that serves as a repayment guarantee in case of default. This makes them accessible for applicants with bad credit too. However, there's always a risk of losing your asset, so you need to go into this form of debt only if you're sure you can repay it.

As you can see, there are tons of alternatives, so even if you have credit issues, there are always options to choose from.

Misconception 6: Payday loans will ruin my credit

Payday loans don't affect your credit if you don't miss your payments. While traditional lenders always perform hard credit inquiries through major credit bureaus, payday loan providers check your data through alternative sources. This means that your payday loan application is not reported to the bureaus and is not displayed in your credit report. It also has a positive impact on the speed of loan processing.

However, this also means that payday loans can't help you build credit, even if you repay them on time. This type of loan is designed to help you get fast cash without leaving any trace on your credit profile.

Bottom Line

Although payday loans are shrouded in a cloud of doubtful myths, they can be a helpful tool. Whether a payday loan is a good or bad financial decision depends on your financial situation and the way you're going to spend the money. When it comes to loans, you need to have critical thinking skills and delve deeper into the topic to understand how they work. This will help you make the right decision and avoid the most common mistakes that people make when they go into debt.

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