Payday loans or cash advance loans serve a specific purpose and as long as they are used for what they where intended to, they can be an excellent financial tool. The main reason why payday loans are considered to be too dangerous is the problem they cause when they are used for other purposes than what they where meant for. When used as a substitute for regular financial loan products, the high interest rates charged make it very easy to get into serious difficulty and ultimately result in the borrower being unable to repay the original loan amount or the interest. This situation normally leads to the borrower going into default and having to then deal with legal fees on top of the loan debt.
Very high interest rates
Payday loans do carry higher than normal interest rates and fees. However, when taken against the background of limited or no credit checks and the general risk profile of the borrower, they actually offer a reasonable value for money.
The risk that the lender is taking is considerably higher than other lenders that offer loans that require stringent approval criteria and income verifications.
Put simply, the lender is entering into an agreement with little or no comfort that the loan will ever be repaid or not. To compensate for loses that he undoubtedly incurs as a result of this practice, the lender needs to charge much higher rates of interest in order to make his business profitable. At the end of the day all lenders are in business to make a profit and if they aren't they wont be around for very long.
What purpose do these loans have?
Once again, as long as these loans are entered into with adequate knowledge and are used for what they where meant for, there is no risk of getting caught into a vicious circle of debt. When you look at the facts and ignore all the urban legends that surround these types of loans you will see that they can and do represent fair value for the risk taken.
It's like that old adage about a bad workman blaming his tools. The tool itself is not at fault, it's almost always the user of the tool trying to blame an inanimate object for their own failure. It's the easy way to save face. It would be the same as trying to use a mortgage to finance a vehicle purchase over 25 years. The wrong tool for the wrong purpose.
The root of all evil?
So, to recap, payday loans should only be used for emergency situations. If you have the time and credit rating to qualify for another source of finances, you should. Only if you need some cash for an emergency to cope with some unexpected expense should you apply for a payday loan.
When the loan is fully paid off, don't make a habit of resorting to them every time you need money. Try and get money through other means before resorting to a payday loan. You need to remember what they are meant for and that their costs are high enough to only use them on the odd occasion.
The increase in household debt is becoming a serious problem all around the world as we chase the material possessions that we can't wait to save for, but blaming the increase in debt on the financial market for offering payday loans is as wrong as it is stupid. Now is the time to take responsibility for your financial situation and not blame the financial products for all our errors. All financial loans are there to be used with discretion, and a full understanding of the terms and conditions that are connected to them. Ignorance is not an excuse.
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