Payday loans are short-term financial arrangements intended to help individuals who cannot obtain traditional loans or credit cards. Designed for emergency use, these loans are structured differently and provide more flexibility and higher approval rates for borrowers. Payday loans are sometimes referred to as cash advance loans or payday advances because they are intended for short-term cash flow difficulties that occur between scheduled paydays.
Why payday loans are necessary
The payday loan industry arose in response to demand from a chronically undeserved group within the financial community. Individuals with no credit history or with credit difficulties in their past were routinely denied credit cards, lines of credit and other loan arrangements by traditional lending institutions. As a result, these individuals had limited or no options when financial emergencies struck. Payday loans were created to serve this community and to provide them with the financial assistance necessary to allow them to handle these emergencies in a timely and efficient way.
Payday loans in-depth
Payday and cash advance lenders evaluate loan applications based on the borrower’s ability to repay, not the information contained in a traditional credit report. Past credit problems are usually not considered, but additional information may be obtained from a non-traditional credit evaluation service. Payday lenders typically look at only a few factors when determining whether to provide a loan to a particular applicant:
- Current income
- Current bank account status
- Permanent resident status
- Past payment history on other payday loans
Federal law prohibits payday lending to members of the military, their spouses and their dependents.
Typical uses for payday loans
Once approved, the borrower can receive funds much more rapidly than with other lending arrangements; in-store loans are delivered on the spot, while online lending companies typically deposit the funds into the borrower’s checking or savings account overnight. Borrowers can use the funds for any purpose, including the following:
- Automotive repairs
- Replacing a major appliance
- Repairing heating or air conditioning systems
- An unexpectedly large utility bill
- An investment opportunity
- Veterinary or medical bills
For individuals who cannot obtain the credit they need from traditional lending institutions, payday loans represent a real alternative for acquiring funds quickly in a financial emergency.