A Cash Advance Can Help Save Money But Is Not Without Risk
May 2nd, 2007 Loans
A payday loan, also called a cash advance, is defined as a small short-term loan that is usually extended with no credit check. As the name implies, payday loans help people tide over temporary liquidity crises between paydays. There is no saying when an emergency may occur and if at that point a person is stranded for cash, there may be very few alternatives. Emergency car repairs, medical expenses, and mortgage fees are but a few situations that can crop up between paydays.
Everyone has heard of the high interest rates associated with a cash advance or payday loan. Many borrowers are likely facing immediate liquidity problems and because these loans are often issued with minimal background checks, there is a fair amount of credit risk involved for the lender. The chances of the borrower defaulting on a payment are not insignificant. These factors lead to a high rate of interest charged on payday loans and cash advances.
There are a few risks for borrowers who choose payday loans as a financial solution. While a credit check is rarely done for a cash advance approval, defaulting on the loan could still lower credit scores or lead to legal action from the lender. There is also a chance that one might fall into a cyclical debt trap. Yet, data shows that payday borrowers are more likely to be long-term customers who give repeat business to the lending institution. There are so many repeat customers because, often, borrowers make use of these cash advances to tackle recurrent credit difficulties such as credit card and utility payments. The cash used to pay these bills on time helps the borrower avoid late payment fees or even discontinuation of service. In such cases, payday loans are a means of saving money and keeping the credit strong.