Pros And Cons Of Payday Loans

A payday loan refers to a small, short term cash loan which is given to customers between paydays to help them overcome financial difficulties during that period. Payday loans are also known as paycheck advances or cash advances and normally limited to an amount of $1,500.

Payday loans have generated a fair amount of controversy. Critics claim that payday loans target the young and the poor and low income communities who do not understand the value of money. Often critics have compared payday loan lenders to loan sharks because they levy very high interest rates on the loans. Normally a payday loan lender charges anything from 250% onwards for the loan. When compared to the middle class community who pay something like 25% interest on credit cards, the young and poor of the community pay a much higher rate of interest on payday loans and hire purchase contracts.

In contrast, proponents of payday loans argue that payday loans fill a gap that national banks cannot fill and the cost of processing a payday loan is not much higher than other long term high principal loans. Supporters of payday loans further argue that the interest on a payday loan is less than the costs that the borrower has to incur when a check bounces or pays credit cards loans late. They argue saying that conventional interests on payday loans are not profitable. The Federal Reserve Bank of New York’s prepared a report on payday loans which said that these loans fill the shortage of household cash flow between paychecks and could contribute to improved wellbeing of families who avail payday loans. The report further added that families usually took payday loans for urgent requirements like paying for groceries and utilities.

Source: http://www.ezinearticles.com

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