What are Payday Loans?

What are the pros and cons of applying for payday loans? On the plus side, payday loans provide cash upfront, typically $100 to $1,000 and you can use this money nearly instantly to pay emergency bills. For instance, if you need to get your car back from a towing company or settle a medical bill in a hurry, payday loans may yield the cash flow you need to make ends meet.

In addition, applicants for payday loans often don't need to supply that much information. Unlike standard loans, which require that applicants provide detailed income profiles and credit reports, payday loans dole out cash advances without background checks. Thus, if you have terrible credit or if you're a military officer or foreign national in the US without cash on hand to deal with situations, payday loans may provide a nice stopgap.

On the flip side, payday loans often come with exaggerated late fees, huge interest rates, and major finance fees. In addition, most payday loans are short term loans. You'll get anywhere from one week to one or two months to pay back the loan in full. Thus, if you budget poorly, or if you fail to keep track of your loan charges, you could end up with a very costly long-term financial problem.

Indeed, the numbers can be staggering. A typical standard bank loan, for example, may charge between 4 and 7 percent APR on a loan. Compare this to the APR on a typical payday loan, which can range from 300 to 400 percent all the way up to 6,000 percent or higher.

Moreover, not all quick fix loan companies are reputable. Some institutions are tethered to banks, and others work hard to stay above board and keep in good standing with the Better Business Bureau. Others, unfortunately, are little more than usury shops, and gray market dealings at these businesses are common. Given these caveats, experts recommend that debtors considering payday loans should read the fine print carefully and search for alternative methods of financing.