Credit plays a very important role in the lives of most people today. It allows us to get things that we cannot afford. So if you want to understand finance thoroughly, then credit is one of the things that you should focus your attention on.
Importance of Loans
When you want to buy a house for example, you would be very fortunate if you could pay for it in cash. Most likely, you are like most consumers who would need to get a loan in order to get to afford a house, even a modest one. The same thing is true when it comes to cars and other things. A loan can open up doors for you. A loan allows you to use money that you still do not have at the moment. In the case of buying a house for example, when you put together what you will earn from your work over the years it would be enough to buy the house, but by using a loan, you can get that amount even before you have it.
Loans can open up doors for you. If used correctly, it can be a very beneficial financial tool. But there is also a wrong way of using payday loans, which is why you have to be careful in using it.
Types of Loans
In order for you to fully understand the importance of loans, you should become aware of the different types that are available. Here are some of the loans that are available in the market right now.
Open and Closed Ended Loans
Open ended loans are the types that you can keep on borrowing. This would include credit cards and lines of credit. Every time that you use your card, the available credit goes down and goes up again when you make a payment. Closed ended loans are those that you can only use once. Mortgage loans would be the best example of this type. When you need more money, you would have to borrow again.
Secured and Unsecured Loans
Secured loans are those that are based on an asset. A borrower may offer a property for example as a security of the loan. When the borrower is unable to make payments, then the lender would have ownership over the property. Unsecured loans on the other hand, are loans that are given without the use of securities. It is not easy to get an unsecured loan and would normally require very good credit.
Conforming and Non-Conforming Loans
Conforming loans are loans that follow the guidelines that have been set by Freddie Mac and by Fannie Mae. Non-conforming loans on the other hand are those that do not follow those guidelines.
These are very broad categories under which the different loans out there can be classified. Awareness about these different types of loans can help you get your finances in order.
Online Payday Loans
One type of loan which has gained a lot of attention lately is the payday loan. These are short term loans that can be taken against your paycheck. It is ideal for emergency expenses when you do not have enough cash on hand. When you borrow, you are supposed to pay back the loan in full when you get your next paycheck. By then you are also supposed to pay back the fees and the interests that come with the loan. The popularity of payday loans has risen in the past few years. Millions of Americans used it and the total transaction amounted to billions in dollars. There are certain characteristics of this kind of loan that makes it appealing to many consumers today.
No Fax and No Documents Needed
One of the qualities that make payday loans attractive to many consumers today is the fact that there is very little paperwork to be done when you get this kind of loan. This is true for most states, because in some places some documents will have to be submitted to process the loan. For the most part however, payday loans require no fax or submission of documents.
No Job Verification
Since a payday loan is a loan using your paycheck as your security, then it would follow that you should be employed in order to use this kind of loan. Some lenders would then include job verification as part of the employment process. They want to be sure that you really are employed and that you would be getting enough to pay them back. But it might be embarrassing for you to have a job verification done.
The good news is that some lenders no longer require job verification. When you apply for a loan with them, all you have to do is tell them how much your expected pay would be and that would be enough. No one would have to know that you are using a payday loan.
Payday loans have been around for decades and consumers have been relying on it for a long time. But the internet has completely revolutionized how it is being used. In the past lenders operated through brick and mortar branches. That is where consumers would have to go to in order to apply for loans. They would visit the lender’s office, complete the application forms and submit it there. They would then have to wait as to the result of the application.
The whole thing is now done online. The only thing that a consumer has to do is to visit the website of the lender and use the online application forms there. That makes it a whole lot more convenient for the borrower because it can be done anywhere and anytime. If you want to get a payday loan for example, you no longer have to take time out in order to visit the office of the lender. You can do it on your free time at home or even while you are at the office.
No Credit Check
One of the biggest reasons why payday loans are so popular is because of the absence of the same kind of credit check that banks and other lenders run. Payday lenders do have their own method of check the credit standing of a borrower, but it uses Teletrack instead of the big three credit reporting bureaus. Because there are no credit checks, those who are unable to borrow from banks turn to payday loans in order to solve their cash shortages.
Payday Loan Controversy
Before you get the impression that payday loans are positive in every aspect, you should know some other things about it first. There is a huge controversy about payday loans right now because some experts, including those in the government claim that it can cause more harm than good. They have gone as far as to issue warnings and statements against payday lending in general. It is just prudent that you should make yourself aware about the issues that they are raising before you go ahead and use payday loans to resolve your cash shortage.
Legal Status of Payday Lenders
One thing to consider is the legal status of payday lending. Because it is so controversial, you might be wondering whether it is something that’s allowed by the law or not. Payday lending is legal in 32 states. That means lenders within those states can charge the kind of interest that they want. In eighteen states plus the District of Columbia, there are restrictions imposed by the law on the rates that can be charged by lenders. These caps make it virtually impossible for the lenders to charge the normal rates that they do in unregulated states.
The Danger of Debt Traps
The main objection that some experts have against payday loans is the extremely high costs of it. The unusually high rates make it very difficult for the borrowers to pay back the loan on time. According to research, most payday loan users are people with low or limited income. The high cost of the loan makes it hard for them to be able to pay it all back and because there are no restrictions in the number of times that they can borrow in most places, they turn to payday loans repeatedly. This leads to a debt trap which is very difficult to get out from.
Security and Fraud Risks
There is also the question of increased security risk involved with the use of the internet in payday loans. Even if the lender uses SSL in encrypting the information of a lender during application there is always the risk of someone accessing it. Then there are the cases when the lenders are the ones guilty of doing fraud or unscrupulous practices victimizing the borrowers. These practices might include the use of CPAs which are very hard to cancel.
These are the facts in connection with payday loans. As a consumer, you should be aware of these facts because there might come a time when you have to use this kind of loan.