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Do payday loans really solve short-term business cash flow problems?

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For those who have ever experienced a short-term cash flow problem in our businesses, you are fully aware of how much impact this can have on stocking and goods supply. With supply chains increasingly moving towards ‘on demand’ ordering, when you need an order, you generally need it … right now!

Payday loans are a short-term financing option for those in need of emergency funds. These lenders often have fewer requirements than a traditional bank, but also have higher fees and a much shorter payback period. Here’s everything you need to know about payday lenders and how they work.

Not your average bank

While most banks will require a credit check and plenty of other personal information to loan money, payday lenders have much lighter requirements. In fact, most lenders only require your identification, proof of employment, and a checking account. It’s that easy.

While ease of access and convenience are some of the features of direct payday lenders that borrowers flock to, the people who benefit the most from these kinds of loans are those without any credit or those with poor enough credit that they can’t acquire a bank loan.

Short-Term loans

A payday loan is exactly what it sounds like: a loan you’ve have to pay off on your next payday. Usually, this means you’re only given about fourteen days to pay off the loan in its entirety. Traditional loans usually have repayment terms that span months or years, stretching out the dollar amount in manageable chunks. With a payday loan, you only get a few weeks to pay back the entire amount. 

Drawbacks

Besides the short-term repayment terms, payday loans have some other disadvantages. For instance, the APR for a loan of this type can range anywhere between 300-400%, with some as high as 700%. The average rate is about $15 per $100 borrowed; which can add up quickly when you’re borrowing in the thousands of dollars.

Not to mention, the repayment is taken directly from your checking account either via direct withdrawal or a post-dated check that you write yourself. Should your check bounce or the withdrawal overdraw your account, you’ll likely incur fees from both the lender and your bank; adding to the cost of the loan.

It’s also incredibly easy to fall into the cycle of borrowing with payday loans, and many borrowers will end up borrowing more than once. Payday loans are very easy to acquire, which can lead to the temptation to continuously borrow; even with the high-interest and short-term repayments.

Although all lending is regulated in some way, traditional banks adhere to much more strict protocols when it comes to lending, making predatory lending a bit more difficult. It can be easy for a payday loan lender to use deceptive advertising to entice new customers into short-term loans. Be wary of these practices and any firms with a reputation for dishonesty or ill-intent. 

Advantages

Payday loans are very easy to acquire, and take almost no time at all to do so. While a traditional process can take days or even weeks to get a borrower approved, you’ll usually walk out of a payday loan store with your funds the same day. This can be incredibly beneficial when sudden expenses occur that you’re unprepared for.

Payday loans are also good options for when you have little to no savings or poor credit history. With poor credit, acquiring a regular bank loan or even a credit card can be difficult or impossible. Payday lenders won’t check your credit history; as long as you have the three requirements (ID, employer verification, and a checking account) you should be able to get your funding.

Ease, convenience, and a quick approval process make payday loans advantageous for those in immediate need of financial support. Remember that these loans aren’t designed to be used on a monthly basis and using them as such can spiral you into greater personal debt. 

Conclusion

When considering a loan of any kind, it’s good practice to ensure you’re able to afford the entire cost of the loan; including interest rates, extra fees, and the principal balance you’re borrowing. Always pay back your payday loans on time and in full to avoid increasing the overall cost of borrowing the money. Future payday loans may become more difficult to obtain if you’re not consistent in repaying them, or develop a habit of borrowing much more than you can pay back.

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