The Pros And Cons Of Payday Loans
A payday loan offers an easy way to get quick cash without going through a credit check. If a payday lender approves your application, you’ll get a small amount of money that’s usually less than $500. You’ll have to repay the loan with your next paycheck by giving the lender permission to automatically withdraw the funds from your bank account or a post-dated check.
If you don’t repay the loan within those couple of weeks, you’ll have to roll it over into a new loan. This increases the finance fee and the cost of borrowing and puts you in more of a financial pickle.
Payday Loan Pros
As mentioned, payday loans can be acquired without going through the hassle of a credit check, making them options for people with bad or no credit who cannot get financing elsewhere.
As for why payday lenders do not require credit checks, that is because your upcoming paycheck guarantees their loans, so they know they do not have to worry about repayment.
Beyond bypassing a credit check, another benefit of payday loans is fast funding. Depending on the lender you choose, you could get your payday loan funds the same day. Lastly, payday loan funds can be used for whatever you need, whether paying a past due bill, fixing your car, buying food, etc.
Payday Loan Cons
Getting a payday loan can be extremely costly. The borrowing fees can range from $10-$30 per $100 borrowed. While that’s high enough, payday loans can get even more expensive if you have to roll them over, leading to 400 percent or higher APRs.
Payday loan terms are also very short. They must be repaid with your next paycheck, usually within two weeks. If you cannot repay the loan and the fees within that period, you’ll need another payday loan, which will make your costs skyrocket even more.
The short terms and high costs of payday loans can put you in a vicious cycle of debt. And the rolling over of loans into new ones is the number one reason why you should only get a payday loan if you have no other options.
The Pros And Cons Of Personal Loans
Personal loans are often unsecured, meaning they do not require collateral. Instead of collateral, lenders will use your credit score and debt-to-income ratio when making lending decisions.
Personal Loan Pros
You can get significant financing via personal loans ranging from $1,000 to $100,000, and you can use that cash for a variety of reasons, like home improvements, car repairs, wedding expenses, vacations, etc. Loan terms are lengthy, in the one to seven-year range. And unlike credit cards or other financing that can be unpredictable, personal loans offer fixed interest rates and monthly payments that do not change, so you won’t encounter any costly surprises.
Personal Loan Cons
If you lack good credit, the APR on your personal loan could be high. Personal loan APRs typically run between 5-35 percent. Since personal loans offer significant funding and are not too difficult to attain, they could put you in deep debt when it’s not really necessary. Fail to make payments on time, and you could ruin your credit. Also, depending on the lender, you could incur origination fees, late fees, and other penalties that add to the loan cost.
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