Around 12 million people across the United States rely on payday loans each year.

When an emergency hits and your pay is yet to come in, the pressure to find a solution can be overwhelming. Payday loan providers step in to fill this gap by allowing you to borrow against your impending salary.

However, there have been mixed reviews concerning payday loans. To help you discern fact from fiction, here is a rundown of the pros and cons of payday loans.

What Is a Payday Loan?

Payday loans are a short term credit facility that provides funds to borrowers based on their credit profile and income.

The lender will typically charge a high-interest rate, and the principal is usually a portion of your next paycheck (click here for more info).

How a Payday Loan Works

To begin with, a payday loan works best if you need the money in a rush. Once you make an application, a lender will start by verifying both your income and bank account.

If you do qualify for a payday loan, the lender will send the money to your account.

Additionally, the lender will expect you to write a postdated check. The check is meant to cover both the principal and the interest levied on the loan.

Let’s say you get a payday loan for $500 on the 15th that comes with interest totaling $70. Since you repay the loan in two weeks, the lender will expect a postdated check maturing on the 30th.

That check must cover both the $500 and the $70 in interest.

The postdated check is vital for the lender as it’s what assures them you will pay back the loan without being chased around.

Typically, the lender will require you to deposit the postdated check in the verified account. The idea is to have the postdated check cash out the same period as when your paycheck comes in, ensuring the funds to pay it are available.

For many borrowers, the postdated check is something they live with. That’s because, in return, the lender overlooks the most critical component of any loan application – the credit history.

Reasons People Opt for Payday Loans

As with any other type of credit, payday loans are designed to serve a particular clientele. A payday loan may be suitable if:

You Have Poor Credit

If you have a terrible (or non-existent) credit history, a payday loan is compelling since the lender overlooks your credit history.

You Have Little or No Savings

According to a 2019 survey, 69% of households across America hold less than $1,000 in savings. That’s not accounting for those households where savings are non-existent.

For these homes, they live one emergency away from financial ruination. Naturally, a payday loan will, in many instances, be of great use in resolving an unexpected need or crisis.

The Pros and Cons of Payday Loans

Before you take out a payday loan, you have to take stock of both the up and downside of such a facility. From there, you will be in a position to assess if it meets your financial needs.

Let’s look at each of these in detail.


Payday loans get a lot of critiques. Are there any advantages to taking one out?

Easy Access

Perhaps one of the most alluring reasons to get a payday loan is because they are easy to access.

When you approach traditional lenders, they will take some time to evaluate your application and process them if you succeed.

On the other hand, payday loan lenders offer access to the funds within 24 hours. Furthermore, these lenders provide an instant decision on your loan application with others operating 24 hours a day.

Fewer Application Requirements

Traditional lenders ask for a lot of requirements when you apply for a loan. With payday loan lenders, all you need is:

  • To be 18 years and above
  • A Social Security Number of a government-issued ID
  • A regular source of income or job
  • An active bank account

That’s in stark contrast to the proof of income, photo ID, Social Security Number, and a credit check that traditional lenders will ask for.

No Credit Check

Payday lenders don’t run a credit check when you apply. Instead, they opt for a postdated check. If you have a terrible credit score, that can be a lifesaver in an emergency.


Why do payday loans receive a lot of grief? What drawbacks should you consider?

High-Interest Rate

The biggest critique of payday loans is the high-interest rate, with an average rate of 400%. In contrast, interest on personal loans ranges between 4% and 36%, while credit card interest rates lie between 12% and 30%.

The difference between personal and credit card loans is that you have an extended period to repay a lower interest rate, making them more attractive.

Traps Borrowers in a Debt Cycle

When you get a payday loan and have to extend it, the lender charges you an extra fee. On top of that, extending the credit adds to the loan’s tenor, which can spiral your costs.

Before you know it, you may find yourself in a cycle where you acquire a new loan to repay the previous loan.

The Lender Gains Access to Your Bank Account

As a condition to getting a payday loan, you grant the lender access to your bank account.

When your pay comes in, and you don’t have enough money to repay the loan, the lender can take out an overdraft in your account to recover their money.

That saddles you with expensive overdraft fees on top of the charges you incur to repay the loan.

The Loan Won’t Help You Build Your Credit

Payday loan lenders don’t report to any credit bureau. Therefore, even when you repay the loan as agreed upon, it won’t go towards building your credit standing.

In contrast, if you have an outstanding payday loan that ends up in collection, the lender will report you to the credit bureau.

Is a Payday Loan Right for You?

When a financial emergency hits and isn’t payday yet, borrowing against your salary may be a way out of the crisis. However, before you decide, you need to understand the pros and cons of payday loans to determine if this type of credit is the right fit for you.

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