Are There Any Risk Getting A Payday Loan?

Your next payday is just few days away and you are in an urgent need of some money? You have heard of the payday loans and all the benefits they provide, but you are not familiar with it, so you are cautious. It just sounds too good to be true, is there a catch? A hidden risk that you might have to take? Is that too much of a risk?

Credit risk
Credit risk is related to interest rate increasing and a collateral of a loan. The payday loans are unsecured ones. This means your lender will not ask you for the down payment, or guarantee the repayment with your personal property, such as a mortgage. The lender practically gives the money away with no guarantee, practically unsecured. That means that the lender takes risk of you don’t pay your debt on time, or don’t pay it at all. Of course, this option is not recommended, because it’s your duty to pay your debt and there is a legal procedure that will try to force you to do so if you refuse to do it willingly, but the bottom line here is: Nobody guarantees the lender the debt will be paid, and you don’t give anything in return. So, your credit risk, as a borrower’s, in this kind of money lending business is insignificant. The interest rate in most payday loan businesses is fixed at the beginning.

Operational risk
This kind of risk includes all the unwanted things that could happen to a lender company, that could make his regular operating hard or impossible. Of course, payday loan businesses can fail, just as any other business. But it’s not your risk. You don’t have to be concerned about their business results, market share and whatsoever. You just don’t care about the way they run their business. It really is their own business. You are not depositing money, there’s no risk that you will lose any of your assets if the lender’s business goes wrong. The lender is depositing his money in your account, so if anyone is to be concerned here it’s the lender.

Liquidity risk
Simplified, liquidity risk is the risk of any participant in the business being broke because of the loan repaying, or being unable to repay the loan because of being broke. There is really a small liquidity risk here. Liquidity risk means that the paying of the debt will disturb your ability to cover normal current expenses. The amount of money payday loan lenders usually approve is related to your income, usually the half of it. So the lender will give you just as much as you are expected to be able to return without difficulties.

After this short risk analysis, the payday loans seem to be even more attractive.