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The Basics Of Payday Loan Operation

Apr 17, 2008
Payday loans are simple loans that are usually short term in length. These cash advances are typically paid when the borrower receives his or her next paycheck. Payday loans are typically small in size, and carry favorable advantages over regular loans that consumers might not even be eligible for.

The payday loan is geared specifically for lower or middle classed families and individuals. Such individuals do not have pristine credit ratings, and thus, may not always get a loan from a legit financial institution. Because payday loans do not necessarily require a good credit rating, they are very attractive to anyone that has had debt problems or anyone who doesn't have much collateral to offer.

If a consumer is looking for a big sum of cash from a payday loan, they will be sadly disappointed. Most payday loan institutions only offer up to several hundred dollars in advance. Of course there are exceptions, but such exceptions might require collateral or even a good credit rating.

Just like every other loan, lenders offer payday loans because they profit from the interest rates that result in the repayment. It is typical to pay high interest rates- sometimes as high as 20%. This is incredibly inflated in comparison to "real" lending facilities who offer lower rates, but also require good credit ratings and acceptable collateral, which many lower class families will not have either to offer.

There is one thing that consumers should avoid when obtaining a payday loan. A payday loan can commonly cause a cycle of debt. When one payday loan is partially paid, consumers might find that they need another loan just to pay the rest of it. In this case, a never ending cycle of debt will result unless something is done about the situation. To avoid this, it is important to have a good budget that allows for the repayment of a loan before accepting it.

Things such as the cycle of debt has made the payday loan regulated or even banned in some states in the United States. Georgia is a prime example of a state that has had enough of the payday loan, and has outright banned it completely. Other states regulate the maximum interest rates that payday loans can operate at- so as to ensure that cycles of debt are less common. In the end, a good budget can avoid this situation, and payday loans are not to be necessarily scared of.

Final Thoughts On Payday Loans

Payday loans should be obtained as a temporary solution- try to avoid them when possible. The inflated interest rates are much higher than what a normal lending institution would offer. But some don't have the choice due to poor credit history- in which case there is little else to turn to. In that case, be sure to read the fine print and ensure you can pay the loan off when the time comes. Doing so will ensure you don't fall into a cycle of debt, which can potentially cripple anyone's finances for months to come before a solution is found.
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