Payday Loans - Boon Or Bane


Payday Loans are tiny, short-term loans that are normally secured against the borrowers' upcoming paycheck. The loan is sometimes referred to as a Payday advance. Lenders normally check the employment records and payroll details of borrowers before issuing the loan. Pay stubs and bank statements are generally required as proof of employment.

To secure a payday loan, a person can visit any payday lending outlet. They can secure a small cash loan under the agreement that the principle and the interest would be paid back in full on their next payday. The person is normally required to write a postdated check covering the outstanding amount. When the payday arrives, they are expected to visit the loan outlet and pay back the dues in full.

If the person does not pay back the dues by the stipulated date, the lender is free cash the check. And if the funds in the debtor's account are insufficient, they might incur a fee from their bank for the bounced check. The interest rate of the loan might also increase due to the failure to pay back the loan on time.

Payday loans are also available online these days. The application process can be completed online without having to visit a physical office in person. When documents are required, fax is sometimes used in the application process. Once the loan is approved, the amount is transferred to the borrower's account. On the next payday, the loan amount plus the interest and fee are withdrawn electronically from the borrower's account.

There are various legislations on payday loans in different regions. In order to prevent usury or excessive interest rates, limitations and ceilings are placed on the annual percentage rate or APR that a lender can charge on the loan. There have been many instances where lenders have violated these norms.

Payday loans are a highly controversial practice in many places. Many argue that these loans exploit and drain money from disadvantaged communities. It is indeed true that the people that resort to these loans the most are those from low income groups. Since they are most often not eligible to secure loans through the normal process, they are left with no other option than to go in for high interest loans.

Since minimal verification is involved while issuing these loans, most lenders also face a substantial risk of defaulting. Lenders try to defend their high rates of interest stating that the cost of processing these loans is higher when compared to other kinds of loans. While this may not be entirely true, the fact remains that people in lower income groups have no other option but to rely on payday loans to tide over a financial crisis. Only then can really say whether these loans are a bane or a boon to their financial condition.

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