Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 7, 2012

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The country is currently going through hard times given its dismal job opportunities and slow economic growth. The ongoing recession makes it difficult for many people to pay for basic living expenses in addition to timely monthly payments on their homes and cars. Given the times, more and more people are seeking assistance from payday loans.

A payday loan is essentially a cash advance that is secured by a borrower’s post-dated check or by electronic transfer.  A payday lender will hold a borrower’s post-dated check until the borrower’s next payday. Once that day arrives, the payday lender will deposit the check and claim their money unless the borrower extends the loan through a practice called “rolling over.”

This short-term financing option is how some people are able to make payments on time, avoid mounting debt, and prevent additional fees derived from late bills.

There are a number of reasons a payday loan may be the right fit for a potential borrower.

First, unexpected expenses may arise at the most inopportune times. Car accident expenses, funeral expenses, or sudden medical expenses are just a few of the reasons that a payday loan may be sought out. These loans make it easier to get by to the next month since they indiscriminately provide cash to virtually anybody with a checking account.

Second, unlike most traditional loans, which can potentially take days or even weeks to receive approval, a payday loan allows a borrower to have cash in hand in less than 24 hours.

Finally, not every borrower has excellent credit, nor does every borrower have valuable assets that can be used as collateral for traditional loans. Borrowers with poor credit and no collateral are able to qualify for payday loans since this financing option doesn’t have a credit requirement or security requirement outside of a postdated paycheck. Due to these relaxed conditions, payday loans are the only type of loan available to some borrowers.

One drawback, however, is that payday loans can increase in amount dramatically over time, which, for some, can lead to perpetual indebtedness. But assuming borrowers have a plan to repay their cash advance by their next payday, these short-term financing opportunities are a great way to come into quick money at a moment’s notice. Borrowers who believe they can catch up on their finances by the time payment is due may reap the benefits from payday loans without worrying about their potential drawbacks.

For borrowers not quite convinced that payday loans are right for them, there are other alternatives. One such option is applying for small loans from a financial institution like a bank or a credit union. Unfortunately, however, small loans from traditional lenders often come with much more stringent qualification requirements.