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Advantages and Disadvantages of Same Day Payday Loans

Advantages and Disadvantages of Same Day Payday Loans

Same day payday loans are meant for the short term borrower, who often finds it difficult to make ends meet before his next paycheck arrives. Here's more.
Aparna Iyer
Same day payday loans are short term loans, provided by non-bank lending institutions, in order to help the borrower make do before his next paycheck arrives. As the name suggests, these loans are provided the very same day by depositing the amount of the loan into the borrower's checking account. The borrower is entitled to receive up to 25% of the amount of his paycheck. In return, the payday loan companies expect the borrower to present them with a post-dated check for the amount of the interest and principal. Generally, payday loans are provided for a period 7 to 15 days. At the end of this period, the borrower has two options: he can either 'roll it over', in which case he is charged a fee in addition to the interest, or he can choose to repay the loan. In case the creditor is not interested in 'rolling over the loan', he can submit the post-dated check to the bank. The borrower's account gets debited by the amount of principal and interest.

Eligibility Criteria
  1. The borrower should be at least 18 years of age.
  2. He should have valid proof of identification.
  3. He should hold a job and should have been employed by the same company for a period of 3 to 6 months.
  4. He should be willing to provide his checking account number, and the account should be active for the past 90 days/180 days.
  5. He should not have bounced checks in the past.
  6. His after-tax monthly income should be around $1,000, and a current pay stub or bank account statement should be presented as proof of the same.
  7. His social security number (SSN) or Individual Taxpayer Identification Number (ITIN), in case he does not have a SSN, has to be disclosed to the payday loan company.
  8. A permanent address, or address of the place where he has been residing for the past 1 year, should also be provided to the payday loan company.

Immediate Cash
This is one of the major advantages of same day payday loans. The borrower has access to cash, which can be used to finance car repairs, pay for utilities, and other small expenses which cannot be postponed.

Credit Card Vs. Payday Loan
Payday loan companies do not expect the borrower to have a good credit score. In fact, payday loans are preferred by people who are unable to charge their expenses to their credit card, either because they have exceeded their credit limit, or because their bad credit history prevents them from obtaining a credit card. If people are unable to pay the minimum balance on the credit card, their credit score gets badly damaged. However, if they are unable to repay the payday loan companies, they may be given the option of rolling over the loan.

No Additional Collateral
Unlike bank loans, which require additional collateral like a car or house, payday loans are sanctioned against a postdated check in favor of the payday loan companies. These loans are meant for people who are unable to provide the additional collateral demanded by banks.

Small Amounts
Payday loan companies provide people with loans as low as $200. Banks, on the other hand, may be unwilling to provide loans for less than $1,000. Although banks provide an overdraft facility, their overdraft fee is very high, and is generally meant for business purposes.


'Get a Payday Loan Today'
Advertisements like these encourage people to obtain a payday loan, but rarely do they mention the disadvantages associated with such loans.

High Rate of Interest
According to the Consumer Federation of America (CFA), payday loans carry an exorbitant interest rate. The rate of interest can be as high as 430%. Considering this, a bank loan might not be a bad idea, since the APR is around 7%, while the APR on a standard credit card is around 12%.

Security Issues
Most payday loan companies conduct their business online. In order to get a payday loan, the borrower is expected to fill out an online application that contains sensitive information like social security number, and details of his checking account. Many times, the borrower is dealing with a no-name company, and this might result in exposing the borrower to a possible breach of security.

Automatic Withdrawal
On the due date, the payday loan company can present the check directly to the bank. In case of Non Sufficient Funds (NSF) checks―checks not honored by the banks due to insufficient funds―the borrower's credit score will not get affected. However, the bounced check will be reported to ChexSystems. Once reported to ChexSystems, the borrower may find it exceedingly difficult to open another checking or savings account.

Just as any other loan, payday loans, too, have their disadvantages. They may be very useful to a cash-strapped borrower; however, repaying a payday loan, which carries a high rate of interest, may become a source of concern for him. There are other alternatives to a payday loan which can be explored by a borrower. He can consider a small loan from a credit union. In case of debt management difficulties, he can consider credit counseling.