What Are Payday Loans?

Reviewed: February 20, 2014
By FinanceWeb

Payday loans, otherwise known as cash advances, are unsecured, short term financial arrangements. Generally, these loans are incredibly easy to qualify for, and borrowers receive their cash promptly. While payday loan lenders don’t necessarily make getting an approval difficult, the APRs for these advances are quite steep. Understanding exactly how a payday loan works requires the explanation of terms such as ‘unsecured’ and ‘short term loan.’

What Is the Difference in Unsecured and Secured Loans?

A secured loan requires collateral, or security, in the event that the borrower defaults on their payments. An excellent example of a secured loan is a home mortgage. The property itself is used as collateral, and if the home owner neglects to make payments, the lender is allowed by law to seize said property. This protects the lender and helps to keep interest rates down.

Conversely, an unsecured loan does not require a borrower to provide collateral. As one might guess, because an unsecured loan leaves the lender at a high risk, the interest rates on these arrangements are typically higher than those of secured loans.

Understanding Short Term and Long Term Loans

A short term loan requires that a borrower repay the entire loan amount, plus fees, very quickly. Typically, a payday loan borrower will be able to obtain up to $500 in a matter of hours, which seems like an excellent deal. However, the money must be paid back in a very short period of time, which may or may not be directly related to the borrower’s payday. Normally, the payment term for a payday loan is no more than one month.

A long term loan, on the other hand, most often spans several years. A home mortgage is an excellent example of a long term loan. A borrower will be given as many as 30 years to make repayment.

Benefits of Payday Loans

When assessing the overall value of payday loans, there are some definite benefits to consider. For instance, qualification for one of these short term advances typically only requires that the borrower have an established income and a bank account. More specifically, the dreaded consumer credit rating that holds so many potential borrowers back is eliminated.

Also, the cash advance application process is very quick and simple. Although there are still lenders who work out of onsite locations, more and more people are accessing lenders online. There are fax payday loan and no fax payday loan application processes, both of which never require the borrower to set foot inside of the lending institution. This makes these loans super convenient. Furthermore, applicants often have an approval within 15 to 30 minutes, and their cash in no more than 24 hours.

The Downside of Payday Loans

While there is little argument that payday loans are very easy to qualify for and that they offer a small amount of cash quickly, a borrower will want to assess every option before choosing this course. After all, payday loans are not inexpensive. Some lenders may have APRs up to 300%. Lenders, after all, are risking quite a bit by handing out even small amounts of unsecured dollars. The end result is costly to the borrower.

Another point to consider is that it can be difficult to come by even a small amount of money in the short span of time a borrower has to repay a cash advance. In the event that a borrower is unable to repay their loan on time, they will begin a vicious cycle of late fees and increased interest that can be nearly impossible to catch up. Furthermore, a tardy payday loan payment can have a significant, negative impact on one’s credit score.

Payday loans are a form of small, unsecured loans. They carry very short terms, often of no more than one month, meaning that repayment is due very quickly. While, cash advances are very easy to be approved for, they are also rather expensive ways to get cash fast.