When dealing with a stressful financial situation, a payday loan can seem like a lifesaver. When used appropriately, payday loans can provide a fast infusion of cash to help you cover an emergency or an immediate debt. However, high fees and short payment terms can turn payday loans into a cycle of debt for those who do not know how to manage them properly.
What Is a Payday Loan?
Payday loans are offered in a variety of fashions. This makes creating a set definition for what a payday loan is difficult. Payday loans are generally considered short-term loans for smaller amounts of money, like $500 or less. These loans are due on your next payday with any fees that have been incurred.
As their name implies, payday loans were created to be a bridge to cover the gap between paychecks or to give you the financial boost you need to deal with an unexpected expense.
Payday loans can be a lifesaver when used by someone who understands how they work. However, some borrowers do not understand or cannot afford to pay back the loan and the fee. Week after week, they end up paying fees to delay paying back the loan’s principal. In short order, they will find themselves paying more for fees than the principal they borrowed in the first place.
How Do Payday Loans Work?
Payday loans, deferred deposit loans, cash advance loans, or check advance loans all work the same way. You will write out a post-dated check in the lender’s name for the total amount borrowed and any fees to get the loan. Conversely, you can authorize the lender to withdraw the money from your checking account electronically. The lender will then give you the requested amount in cash.
The loan is usually due to be paid back on your next payday. This could be 15 days or one month later. If the loan is not fully repaid, including finance charges, the lender has the option to debit your bank account or check electronically. Seeing the potential danger in these loans, some states have put caps on the amount of money that a payday loan company can charge. It ranges between 10 percent and 30 percent of every hundred dollars borrowed.
A Lucrative Lending Opportunity
Approximately 12 million Americans use payday loans each year. They spend close to $9 billion on loan fees. This makes payday loans an attractive financial tool for financial services providers to offer. Despite the high loan fees, payday loans are still popular because the application process is easy, there is no credit check, lenders do not require collateral, and short-term loans are easy to process.
For financial services providers looking to offer payday loans, payday loan management software can help them keep track of this aspect of their business. The larger your customer base grows, the harder it is to keep track of payments because each loan has unique terms.
Software to manage payday loans helps financial services providers automate the lifecycle of the loan process. They are automatically kept up-to-date with a loan’s status, starting with the application process through the loan repayment. Some financial services providers only want to focus on automating specific components of the process. Management software for payday loans makes this possible.
As a result, financial services providers enjoy increased efficiency, ease of scalability, and the ability to improve customer satisfaction. Customers do not need to go to brick-and-mortar stores to apply for loans. They can do the entire process from the comfort of their home. Mobile responsive software allows customers to apply for payday loans from their smartphones.
The Pros and Cons of Payday Loans
There is a reason why people use payday loans to help them when they are in a financial jam. A payday loan provides emergency cash. There is also a reason why financial services providers are scrambling to offer payday loans. Payday loans provide a lucrative source of income, allowing lenders to risk relatively small amounts of money in the process.
Borrowers and lenders need to do their research and due diligence before getting involved with payday loans. If all involved understand the process, payday loans can be a vehicle to help people out when they are in a jam.