Rethinking Online Payday Loan - A Risk Versus Benefit Analysis for the Consumer

A payday loan, sometimes also called a cash advance, is a small loan given for a short period of time against one's next paycheck. Therefore, one who wishes to receive such a loan must have payroll and employment records. The risks for payday loans can be high. To prevent usury, or excessive interest rates, they are highly regulated. In the United States these loans are legal and regulated in 37 states. After considering the risks of a payday loan one can also evaluate that they could be considered effective in preventing hardship. A risk of payday advance is that it can make the poor lose more money than higher income people. This is because people of a higher income can typically acquire a loan at a lower interest rate. Low income populations are more apt to accept the high interest rate of the payday loan because it is the only way a loan would be available to them.

This could also be considered exploitation of the poor's financial situation. It can become difficult to impossible in some situations to pay back the loan with the high interest rate and get caught in a cycle of debt. The benefits noted include that the payday loan lenders, check out here for details, can provide a loan when other means of borrowing money are not available. Sometimes people who really need a few extra dollars to pay for an unexpected repair can really benefit from such a loan when they already exhausted all other alternatives or have a bad line of credit. It has been argued that without payday loans one would not be able to receive money if they were considered a high risk borrower, therefore the risk of taking the loan is less than the consequence of having no money.

Another important benefit to note is that a study conducted in 2009 by the University of Chicago Booth School of Business found when payday loans were available in areas of natural disaster the populations had better outcomes than other areas where the loans were not available. Such advantages are less foreclosures and unaffected birth rates. An interesting noted fact was that the study also was able to conclude that fewer populations that lived in areas where payday loans were treated for alcohol or drug addictions. In conclusion, payday advances can be risky, but the risks could outweigh the benefits.

Due to the high interest rates it can be difficult to pay back the money owed and be caught in a debt cycle. Although, if no other alternatives are available the risks could be worth the price. If one needed an emergency treatment or a repair on their car it could be worth it in the long run to take the payday advance instead of facing more cost and negative outcomes if the problem was never able to be fixed. Therefore, with regulation and evaluation of risks and benefits it is up to the individual to determine if the payday loan is the best fit for them in their current situation.