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Some financial experts criticized payday loans. They believe it is a bad decision to obtain cash advance because of the exorbitant interest rate and other fees imposed by lenders. In some ways, they are right because many people apply for a loan without clearly understanding the risks of short-term loans. If you are wondering about why payday loans have bad reputations and often criticized, you have come to the right page.
What is Payday Loans?
It is crucial that you know what payday loans so you can fully grasp the reason why many financial experts do not recommend borrowing money from payday lenders. Payday loans are small dollar loan that you can apply for anytime, you need money for unexpected expenses. A short-term loan carries high interest rate and several fees, making payday loan costly. Nevertheless, many people still apply for a loan because of the convenient and hassle free service that lending companies provide their customers.
Why Payday Loans Criticized
Payday loans criticized because of its design. They designed short-term loans to solve financial problems of people who cannot get a loan from traditional financials. Traditional institution expects a credit history to lessen their risk but not payday lenders. Lending companies provide loans even to people with bad credit score. They minimize the risk by charging more for quick and easy access to loans.
With payday loans the interest rate generally charge somewhere from $15 to $30 per $100. The annual percentage or APR is 400%, definitely higher than what banks charges for a hundred-dollar loan. When you default, they charge you with more fees that further make your debt higher. Renewing or extending the loans also incurs charges. In other words, when you have bad credit expect a high interest rate because of the risk involved.
The extra fees that lenders charged their customers are why payday loans criticized and considered a bad solution. Financial expert believe it is unwise to borrow money with high interest rate when you are already experiencing financial trouble. This is true, but when you have no option because of your real life emergencies, the cost of the loan becomes irrelevant.
If you wish to avoid common payday loans trap, you should only borrow money real emergencies and only after you have exhausted all efforts.