Beneficial Features of Payday Loans

Payday loans are a popular type of loan that is given to people on a short-term basis.

Perhaps you have been in a tight fix at various times and needed some emergency cash until your next paycheck. Payday loans are a service designed for this purpose.

Unfortunately, many people in the media and in the government have decried payday loans as being predatory or unfair. Let's take a look at whether this is warranted, and whether there are any beneficial features of payday loans.

Usually, the argument against payday loans is that they charge their customers an extraordinarily high interest rate. People will claim that the interest rate on a payday loan is often higher than 200%. Is this true? Let's take a look at how they come up with this figure.

A payday loan company might loan you $400 for two weeks, and they might charge a $20 fee. This doesn't seem that bad, since $20 is actually 5% of $400. What payday loan opponents do is extrapolate this number out for the entire year. They say that if you are charged 5% per two-week period, then the compound interest comes out to 256%.

Although this logic may be sound, it overlooks many details. First of all, these aren't usually taken as long-term loans. It would be foolish indeed to take a one year loan for $400 in which $1422.27 is due at the end of the year.

Also, the fees generally aren't compounded. If the loan isn't paid back, the borrower might owe $20 every 2 weeks, or $560 per year. On a $400 loan, this is 130%, which is still outrageous, but not as much as the payday loan opponents would have you believe.

Finally, it is important to consider that these loans are rarely used and are almost always short-term loans. To someone who is in desperate need of a $400 emergency cash advance, $20 seems like a perfectly reasonable fee to pay to avoid having their electricity cut off or to avoid getting evicted from their home. These are undoubtedly beneficial features of payday loans.

There are many beneficial features of payday loans. Payday loans provide a valuable service to people who really need money fast. They are unlikely to be able to get a loan from a bank. They might need to avoid other much more serious consequences than a $20 service fee that the payday loan office charges. If you need a payday loan and have few other options, then you should definitely get one - don't worry about those people who are trying to "protect" you.