Sometimes, delving a little deeper to any issue gives as the benefits of knowledge that aids us understand better why certain circumstances happen. Just like understanding better how a payday loan actually works that could in a long run, guide you in drawing your borrowing decision.
If you refer to published articles that are available in the public domain, you will definitely be fed up with lots of diversified ideas and concepts pertaining primarily to “Payday Loans”. You might get yourself too much engrossed reading sweet talks about it and sometimes you’ll get a little discontent once you come across articles that are baked with its sour speculations. But regardless of what others perceive about it, opinions are purely dependent on a case-to-case basis.
Payday loans are monetary loans that are usually short-term, and are bound by conditions such as a repayment plan that is executed once the borrower receives his next paycheck. It incurs higher interest as compared to other loans which are designed with collateral mechanisms.
One sure point that others may actually invoke is the inclusive interest rate term of this loan type. Basically, the explanation that can at large suffice is that such loan is unsecured loan which is not backed up with any physical assets that the lender can repossess once the borrower defaults to pay. Of course, it is business, in whatever perspective one would want to look at it, lending institutions will surely devise themselves with ways on how they can get profit out of the service they offer. Remember, lending of money is a risk, and in today’s society, risk incurs money.
You might ask: why would they charge interests that are quite higher compared with the interest rates being charged by the mainstream financial firms like banks? Answer to such query is simple.
It is because of the following key reasons:
01 Time and money are two inseparable values to consider.
Why would one financial institution re-invent the wheel of money lending industry that is complacent in the present market? Ever since, there has always been the concept of money being valued by time and time being valued by money. This is already the trade that defined the cycling loops of money lending business. They get returns on the principals invested based on the interest they charged that will run throughout the loan life. Think of it this way: if you borrowed money five years ago, do you think that same amount of money can have exactly the same value as of today? Of course not â€“ it’s affected by other economic factors like inflation rates that alter the value of money over time. I told you, it’s purely â€œbusinessâ€.
02 You’re paying off technically not just the money you borrowed but also your risk to default.
Who would want to engage into business without any sort of guarantee? The fact that payday loan is unsecured which means that the lender has nothing to recuperate once the borrower failed to comply with his repayments, charging a higher interest is indeed a reasonable way they deemed appropriate. This way, at least to say, they have a partial cut to the amount of money they risk to the borrowers.
It is always advantageous that we see things in a clear lens. We must understand that in any type of business, conditions are strategically set and whoever engages to it must be fully aware of the rules he needs to abide and the repercussions that he will face once he disobeys.