The 4 Pros & 7 Cons of Payday Loans

Payday loans are a quick way to obtain cash when you need it urgently. Payday lenders offer financial services to people with no credit or low credit scores, an accessible way to get a cash advance when an emergency arises. If you have a regular income source, you can obtain a payday loan with few questions asked.

While payday loans are a convenient way to borrow money, they come with significant risks. It’s easy for borrowers to end up trapped in a circle of debt, unable to pay off these loans. Here we explain the pros and cons of payday loans so you can make an informed decision before borrowing money from a payday lender. 

4 Pros of Payday Loans

If you urgently need money to hold you over until your next paycheck, payday loans may be an option worth considering. You can obtain a payday loan quickly, usually in less than 24 hours. Payday loans have fewer requirements than traditional loans and don’t require a high credit score, so they offer a quick fix solution during a financial crisis. 

1. Quick Cash

The primary advantage of payday loans is obtaining the money you need quickly. Borrowers can apply for payday loans online, with most online lenders offering payday loans 24 hours a day, seven days a week. The steps from application to approval of a payday loan are easy and straightforward. Once you’re approved, the cash is deposited directly in your bank account.


2. No Credit Check

Unlike with traditional loans, bad credit and a low credit score aren’t impediments for borrowers in need of a payday loan. At the most, payday lenders may make a soft inquiry into your credit history. Since they don’t make hard credit inquiries, you won’t have to worry about a decline in your credit score. 

3. Fewer Requirements than Traditional Loans

When you apply for a payday loan from an online lender, you can be relatively confident you’ll be approved. You’ll need to meet the following requirements before applying for a personal loan from a payday lender: 

  • Be at least 18 years old
  • Be employed or have another stable income source 
  • A government-issued ID or social security number
  • Proof of income
  • An active bank account
  • Post-dated check

If you meet these requirements, you shouldn’t have any problems getting approved for a payday loan. In comparison, traditional lenders usually require proof you can repay the loan and a credit check, in addition to a photo ID, social security number, and proof of income.   

4. Unsecured Loan

When you take out a payday loan, you don’t have to worry about losing your house, car, or other valuable assets because these loans don’t require you to provide collateral security. If you default on a payday loan, the lender can’t seize your valuable assets like they would at a Pawn Shop. 

A pawn shop sign.

7 Cons of Payday Loans

Although payday loans are easier to obtain than traditional loans, the ability to borrow money quickly from these lenders comes at a high cost. Before agreeing to borrow money from a payday lender, it’s crucial you have a realistic repayment plan and understand how it could affect your financial future. 

1. Payday Loans Are Expensive

When you’re strapped for cash or have poor credit, payday loans are an attractive option. But you should keep in mind these easy to obtain short-term loans come with significant late fees and very high interest rates. 

The annual percentage rate on a payday loan is close to 400%, interest rates much higher than traditional loans. Rates vary depending on the state.

In contrast, the annual percentage rate for high-interest rate credit cards is between 13% and 26%, depending on your credit history. If you don’t repay within two weeks, the interest rate will increase even more, resulting in additional fees. 

2. High Roll Over Fees

Four out of five payday loans are rolled over when borrowers can’t pay back the loan amount by their next payday. When borrowers can’t repay the loan amount, they can either roll it over or take out another loan. 

Most borrowers renew short-term payday loans, so many times, they end up paying back more in fees than the amount they borrowed. This traps borrowers in a vicious cycle of additional fees where they make payments on the small loan for months and sometimes years. 

3. Access to Your Bank Account

Granting payday lenders access to your credit union, or bank account is often a condition of taking out these short-term loans. Most lenders will ask you to sign a post-dated check authorizing them to debit your checking account. If you don’t repay the loan by the due date, they can cash the check or withdraw the money directly from your checking account. 

If you don’t have enough money in your checking account when a payday lender attempts to cash your check, they will repeatedly try to withdraw the funds resulting in costly overdraft fees for the borrower. However, the Consumer Financial Protection Bureau has placed limits on excessive fees. 

4. Impact on Credit Score

If you aren’t careful, payday loans can ruin your credit score. Although payday lenders don’t usually check your credit when you take out a loan, they may report missed payments to the credit bureaus. If they submit your unpaid debt to a collections agency, the agency will often report your failure to pay to the credit bureaus, damaging your credit score. 

Repaying a payday loan on-time doesn’t have a positive impact on your credit score. Thus, payday loans won’t help you build your credit history because paying them on-time doesn’t improve your credit score. But you should keep in mind that not repaying them on time could have a negative impact. 

A man and his credit score.

Most lenders approve anyone with a credit score over 600.

5. Collection Practices

If you fail to repay a payday loan, lenders will probably refer your case to a debt collection agency. You can expect to be bombarded with harassing phone calls about your debt once this happens. If the aggressive phone calls don’t work, you will likely receive threatening emails from lawyers. 

6. Payday Lenders Can Sue You

If you fail to repay a payday loan, payday lenders and collection agencies can take you to court to obtain the debt. If they are successful in court, the result will end up on your credit report. Furthermore, if a judge issues a judgment against you, you could face imprisonment, wage garnishment, or seizure of assets. 

7. Trap Borrowers in a Cycle of Debt

Payday loans are short-term predatory loans, meaning they impose abusive terms to exploit borrowers with bad credit and trap them in a cycle of debt. 

The payday lending financial services model makes it almost impossible for borrowers to repay loans without rolling them over or re-borrowing. Thus, most borrowers accrue significant interest on short-term payday loans, and payday lenders make substantial profits when borrowers can’t repay. 

Final Thoughts

It’s essential to understand the risks and benefits before taking out a payday loan. If you are in a bind, these personal loans could be a convenient way to obtain cash until your next paycheck. However, the annual percentage rate on these loans is significantly higher than traditional loans, student loans, and credit cards. 

To avoid becoming caught in a payday loan debt cycle, make sure you’ll be able to repay the loan within two weeks. Understanding the pros and cons of payday loans will enable you to make informed personal finance decisions before borrowing money.

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Riley Draper