Payday loans are termed as ‘quick and painless’ loans. They may be really quick, but not quite painless. They may reflect positively on the credit report, but it has been observed that payday loans and credit score usually have a one-dimensional relation; payday loans decrease credit score because they have a vicious cycle at work most of the times due to heavy interest rates.
Payday loans, for starters, are the loans which have a term between two and five weeks. They are approved almost immediately, and are usually of low amounts, which can be paid through the next salary. They are designed to meet sudden requirements when one is out of funds, and is in dire need of them. The most interesting aspect of payday loans is their interest rates. While they are unsecured loans, the interest rates are usually in excess of 20%, and may shoot higher than that. 25% interest rate for a two week period is pretty common.
The effect of this is that one may pay a lot larger amount and therefore further fall in debts. Also, it induces a cycle of events. For a loan as small as $100, the total amount to be paid is $125 on the payday. Usually, the amount isn’t that small, and therefore, it may further create insufficiency of funds for the next month, and the consumer may again go and ask for the payday loans. It continues until the asking is stopped, or rejected, or a person is in huge debt already.
As an individual, one can do everything possible to avoid payday loans. The first and foremost option is asking family and friends, and checking if there is any small amount that can be used to cover the insufficiency. Usually, people try to avoid asking for help; at times of financial turmoil family and friends can be very useful resources. If there’s no help from that end, the next thing that can be done is asking their employer. Since one is expected to pay off the loans on the next payday, it is better asking for an advance. In most cases, when the request is rare, or when the employee’s record is straight, the employer is generous enough to grant advance paycheck. The final thing one can do is asking the person who owes him or her money for an extended period. If one is asking for a payday loans, it is obvious that he expects to pay it off when the next paycheck arrives, and so it is really easy making a decision.
Payday loans and credit score have a relation that may harm you so it’s better to avoid them if one can.