Payday Loans compared to other loans

Payday Loans allow customers to borrow small sums of money for a short period of time from non-traditional lenders. These loans have both advantages and disadvantages over the traditional forms of credit (e.g. the credit cards and mortgage loans), some of which are listed below.

- Advantages
Greater Accessibility

Although payday loan companies have specific requirements that a borrower must meet (e.g. an open bank account, a proven and steady source of income, etc.), these are much more lenient than the requirements imposed by banks and other large credit institutions. For example, to obtain a payday loan, a customer needs not have a good credit history or large income, two of the mandatory prerequisites for many credit card approvals. For some financial products, banks even require excellent credit history while payday loan providers do not look at credit reports.

No Collateral Required
Many standard loan providers demand that the borrower guarantees the repayment of the loan by pledging some collateral, usually the item which the loan is intended to purchase. Unlike these, payday loans do not require collaterals. Furthermore, while standard loans may be spent only on the specific object for which they have been taken out (e.g. vehicle and home loans), there is no such limitation on payday loans – a borrower can spend them any way they choose. The only requirement is to have sufficient funds to pay off the borrowed amount.

Available Online
Many payday loan institutions have presence over the Internet and allow their customers to apply for a loan online. This speeds up the application process and makes it possible for the customers of certain companies to receive the borrowed funds as early as 30 minutes after the loan approval. Even if the money is not wired immediately, the borrower receives them within a period of 24 hours.

Fast Payoff
The hidden agenda behind most types of loans is to keep borrowers in debt as long as possible. The greater the duration of a loan, the more interest the lending institution will be able to collect from the customer. Thus, some loans are to be repaid in 25 or 30 years, and interest accumulates. Payday loans are different in this respect. They mature shortly after they have been taken out, usually on the date when the borrower’s next paycheck is due, and, as a result, do not allow for the accumulation of large interest charges. Some loans are to be returned within a period of one week.

- Disadvantages
Bigger Interest Rate

Given the advantages of payday loans, it is no surprise that their interest rates are often higher than those of the traditional loans. The customer pays $15 to $25 for a borrowing of $100. They may also be encumbered with additional high charges, such as processing fees and late repayment penalties, depending on the policy of the specific payday loan company. The top complaints which have been received by the Canadian Payday Loan Association are with respect to wage assignment, privacy, lack of written documentation, excessive fees, and inadequate disclosure regarding the costs of borrowing. Other complaints are related to poor customer service, rollovers, and collection practices. Moreover, CPLA has reported a case in which the rate of interest reached the whooping 1242 percent. The loan term was just 17 days.

Smaller Sums Loaned
Payday loan companies do not permit borrowers to take out large sums of money and are intended to cover only small daily expenses. Typically, these loans do not exceed $600 CAD for first-time clients of a company or $1,500 CAD for regular borrowers.