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Cash Advance Stores Analyzed: How Bad Are Payday Loans?

I’m going to talk about a controversial subject today. Any American reading this page is familiar with the cash advance stores strewn about their community. Today, I want to discuss that topic, but I want to approach it from a different perspective than most online bloggers would. Please bear with me.

When you go to a payday loan website, you’re likely to read something like the following:

“No credit check payday loans are a way that many people these days can pay bills or unexpected costs, helping the person get through tough financial times and maintain their lifestyle or their ability to work.”

California Reinvestment Coalition and Zoe Lofgren Protests Payday Loans

Rep. Zoe Lofgren Led the California Reinvestment Coalition in a Protest of the Payday Loan Industry.

That’s what was on this website when I took it over. I don’t want to shill for cash advance stores, so I decided to rewrite this page. I also don’t want to criticize people who make financial decisions borne of desperation and a lack of good options. So I want to go into this subject with an open mind.

These cash advances are (no duh) controversial with some who think people pay too much to get loans, so I wanted to dissect the practice somewhat and analyze whether it’s a good idea to take out a payday loan.

Since I want to present the full picture, I’ve decided to offer a “pros and cons” analysis of no credit check payday loans. You might need the cash advance, but feel nervous about taking someone else’s money. A friend or loved one might have asked you what you think and you didn’t know what to tell them. To give you both sides of the story, I’ve listed the pros and cons of payday loans. That way, you can make a reasonable decision yourself. Since most people are unfamiliar with no credit check cash advances, I’ll speak on behalf of the payday loan services first.

After that, I’ll offer a rebuttal–where you can see what the critics say. When I’m finished, you’ll get both points of view and can make a decision with the full facts. Also, this will give readers insight into the over-logical, usually even-handed, often conflicted nature of my INTP brain. 🙂 Alright, enough of the setup; let’s talk about how payday loans work.

How Do Payday Loans Work

Most pay day loan services offer money up front if you show them you have a job–that is, by showing them a recent pay stub. The two parties agree on a cash loan. The debtor (you) write a check for the amount of the loan plus the interest. The payday loan service holds onto your check until an agreed-upon time (sometime after your next payday), at which time they cash the check.

If you realize before the check gets cashed that you can’t pay fully and the check is going to bounce, you can go back in and extend the date when it needs to be repaid. But this increases the interest, thus increasing the cost of your eventual payments.

Most people who need a payday loan can get cash advances of between $100 and $1,500 in a matter of minutes. In most cases, what you need to prove is that you have a visible means of income. If you can show a recent pay stub or a government check, you’re probably going to be able to get a loan.

Advantages of Payday Loans

  • Confidentiality
  • No Fax Required
  • Often up to $1,500
  • Bad Credit Is No Problem
  • One Minute Application Fill-out
  • Safe and Secure Applications
  • Helps with Emergency Repairs
  • Good One-Time Fix

Payday Loan Benefits

The benefits of a payday loan service are many. They understand people needing emergency loans are often embarrassed by their predicament, so they maintain strict confidentiality. Many of the good ones require no faxes, since most people don’t have fax machines and therefore need a local business to send their fax.

Bad credit isn’t a problem, since the credit risk is offset by high interest rates. The application forms are quick and easy to fill out so you can spend more of your time figuring out how to make money and less time worrying about paying bills. This is especially good is you walk into a payday loan office, since friends, family, and coworkers might see you waiting inside. When you fill out a payday loan application online, the methods used by the best payday loan companies are safe and secure.

Payday Loan for Emergencies

I can see the “no credit check payday loan” as a good option if you have a one time emergency and you need some extra cash to see your way through. For instance, imagine you have engine troubles with your car and your work status depends on getting to and from your workplace in that car. If you lose your income by losing use of that vehicle, it’s obvious that it’s going to cost you more money not to repair the engine than paying for the repair costs and associated fees.

If you can’t get a bank loan, credit union loan, or personal loan to make those repairs, you don’t have many alternatives. If you walk into a cash advance company and apply for a payday loan, you’ll be walking out of the place in a few minutes with the cash for repairs. The interest payment for a few hundred dollar loan is going to be something you can afford and you’ll be able to justify it as an expense of keeping your job. You don’t like the interest payment, but you’ll be able to continue working, earn the money to pay back the loan and interest, and go on about your life.

Disadvantages of Payday Loans

  • High Interest Rates
  • Short Term Solution
  • Desperation Move –Other Options Might Be Better

Payday Loan Interest Rates

The interest rates you pay on a payday loan is going to be significant–higher than you would pay for a bank loan. Just imagine you’re running a loan service and you’re giving out money to anyone who shows you a pay stub. You’re going to have to pay enough money to make a profit, but also cover all the loans where a deadbeat simply walks out on their debt. So you have to charge more than a bank does, because some of the people getting loans are bad credit risks.

Credit card companies do the same thing. Two people get a credit card from VISA or Mastercard, but they have much different credit scores. The one with the good credit score gets a low interest rate. The one with the bad credit score gets a high interest rate. Both remain credit card customers. Everyone needs loans and the credit institutions find ways to make the process work for most people. The cash advance service works on the same principle.

Cash Advances – Short Term Answers

All of this is sustainable for a person as long as they understand these are short term solutions. If you don’t address the underlying causes of why you needed the payday loan in the first place, the payday loan company is not going to help you in the end.

Remember back to the example of the car engine repairs? If the problem is no more complex than repairing your car, then you’ve solved the problem. But if you’re working and working and still falling behind or you have crippling credit card debt that’s siphoning off your excess cash, other solutions need to be found. Taking out a payday loan is only adding to your expenses.

In these cases, you might need to moonlight in a second job for a while, whether it’s to supplement your income in tough times or to pay down your outstanding debts. If you can’t see yourself working two jobs, then you’ll need to find a better paying job than the one you have–either inside the company you work for (through a promotion or a raise) or through gainful employment elsewhere. Whatever the case, payday loans aren’t the solution–you have to change the whole equation, somehow.

Alternatives to Payday Loans

That’s left for an entire different how to guide. For now, I feel the need to list suitable alternatives to payday loans, if you can’t get a loan through your local bank or credit union. Online peer to peer loans is a growing phenomenon these days. What you do is borrow money from a stranger through some sort of a broker.

P2P Lending – Crowdsourcing for Money

People are willing to pay money to you and you pay them back the way you would a payday loan company. You don’t owe money to a corporation or creditor retail chain, but your creditor gains assurance you’ll pay them back. Examples of “peer-to-peer loan websites” include Prosper (the biggest one), Lending Club, Zopa, and Virgin Money.

I’m pretty sure VirginMoney only offers its services to debtors in the United Kingdom, South Africa, and Australia. That might not be the case by the time you read this article, so people needing cash in North America should check the website, anyway. This is an emerging industry, but Zopa is the biggest UK social lending site at the moment. The Weemba site you see advertisements for everywhere online is similar to the social lending sites, though We3mba’s bosses are quick to point out they are not brokers for social loans, but facilitators (my word). The peer to peer services offer better deals than the cash advance and payday loan companies, so try them first.

Do-It-Yourself Debt Consolidation – DYI Debt Repair

If you have rampant debt, consider paying down your credit card bills. Then cut up your credit cards, while leaving open one line of credit for emergencies. Avoid the “debt consolidation companies”, because most of the time they aren’t going to be able to help you with anything you couldn’t do yourself.

I’ve written before about negotiating new credit bills with the credit card companies, using the “I’ll file for bankruptcy” threat as your leverage. This is an economic alliance. Like Machiavelli said, the weaker partner in an alliance always has the implied threat they’ll simply collapse. Jim Cramer says the debtor is a slave to the lender, but the weaker party in a financial bargain always has that one implied threat. If you collapse financially (go bankrupt), your creditors get no money, so it’s in their best interest to set new terms where they get paid some of their money. Besides, these vampires have been draining off your money through interest payments for a long time, so they made a profit on you a long time ago. “Loan modification” is a legitimate practice, so try it.

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