Payday Loans vs. Standard Credits
Quick credit in most developed economies is known under the name payday loan – or payday advance, salary loan, payroll loan, small-dollar loan, short-term, or cash advance loan. This is no accident at all – the origin of this industry in the Western countries is precisely the very short-term loans given to workers in the 19th century to cover their household expenses to salary.The first payday loans have emerged in the US in the mid-19th century. Click To Tweet
As we have said, the first payday loans have emerged in the United States in the mid-19th century. The banking system in the newly established country has been developing wildly, and many people have not even had physical access to it – and modern products like overdraft have not yet been invented. This has created a flexible network of financial houses that offered super short-term loans to workers in the working class who, for whatever reason, had difficulty in covering their living expenses a few weeks before receiving their salary. This sector was initially completely deregulated, with many benefits, but some risks – de facto, almost everyone had access to credit, but the collection of bad loans was difficult.
At the beginning of the 20th century, the state began widespread regulation of the sector, with payday loan becoming popular in Europe as well. It is only at the end of the 20th century that the sector is expanding to the model we know today – payday loans for multiple television buying needs through luxury vacations and small business assets to small property deals.
However, practice shows today that it is the old ways in payday lending are the best – that is, this product is used most successfully by people with stable incomes who want to cover unforeseen expenses and to repay the loan within few months.
We can summarize that payday loan is best to take when:
- You need a lump sum of money for a specific purpose, and you are planning to return it in a relatively short time;
- For one reason or another, you do not like the credit cards. Recently, their service has become more and more expensive in terms of fees, as banks are reorienting their sources of profit from interest on fees. Handling a credit card is psychologically proven to predispose to higher costs because one does not see the money physically;
- You have no time, patience, or just the desire to go through the much longer procedure of withdrawing a small bank consumer credit. Over the last few years there has been a centralization of the credit approval process, which has further delayed the procedure;
- You consider usurers and pawnbrokers as an over-risk source of money.
On the other hand, it is not a good idea to use a payday loan for:
- Numerous recurring purchases. Though you could cover them with payday loans, it would be far more profitable to use a credit card or overdraft loan;
- One-time significant expense requiring a loan of more than 18 months. In such cases, it is most reasonable to refer to traditional bank financing;
- Returning the payday loan will require monthly installments of more than 70% of your earnings;
Investments. Payday loans have never been and will never be suitable for financing investments;
- Risk speculation in the absence of another stable monthly income.
After I introduced you to the advantages and disadvantages of quick loans you can decide whether to borrow or not.