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10 Most Common Myths About Payday Loans

10 Most Common Myths About Payday Loans

Payday loans are currently one of the most discussed types of financial activity. But the subject of discussion is often not facts, but myths. Today, unscrupulous players still remain on the market, there are law violations: both in the procedures for issuing loans and in the procedures for collecting debts. Such violations form a negative impression about the entire market. But most of them are actually myths that have developed under the influence of misunderstanding, ignorance, fear of the new and the unknown.

Myth #1: Payday loan providers are illegal organizations with a dubious reputation

The first is the myth that microfinance organizations issueing payday loans are illegal companies that aim at deceiving borrowers and taking every single penny from them. It is not true. Microfinance organizations go through the appropriate licensing procedure and operate within the legal framework.

In addition, under current law, microfinance institutions are required to disclose information on interest rates, overpayment and other data. All conditions for obtaining payday loans are publicly available. Many websites have online calculators, web consultants and free hotlines. In addition, information about interest rates and other information is indicated in the loan agreement, which can and should be carefully read before signing. Many microfinance organizations in their information materials warn the borrower about cases and circumstances in which it is not necessary to take short-term loans.

Taking into account the latest changes in legislation, the activities of microfinance companies have become even more transparent:

  • unscrupulous companies that are not licensed will disappear from the market in the near future;
  • a simple standard form of the contract allows you to compare the conditions of different companies, shows overpayment and the total loan amount.

Myth #2: Payday loans are very expensive

The most common myth about payday loans is their sky-high cost. People share horror stories about how borrowers take $1,000 and have to pay back $10,000.

Indeed, APRs range somewhere from 391% to more than 521%, but the most important determining factor here is the loan duration: on average, it is 5-31 days. the longer you use the loan, the more you overpay in the end.

If you take a payday loan for just 7 days, overpayment will be small. If money is needed urgently, this price can be justified. If you do not fulfill your obligation to repay the loan on time and actually repay the loan only after two months (60 days), then a loan becomes really expensive. That is why microfinance institutions issue loans for a short period. Timely repayment is the key to successful and profitable use of the loan.

If you need money for up to 31 days, it is convenient and profitable to take out a payday loan (it’s quick and easy – it takes no more than 20 minutes and involves no paperwork). Now, you can even apply for a loan online and have the money in your bank account as soon as the same day:

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If you plan to use the money for a longer period, then it is better to take loans from banks – it is more profitable, although you will have to collect documents and wait 3-5 days.

When choosing between payday loans and bank loans, you should remember the following: you should assess your financial capabilities carefully. If you are sure that you will be able to repay the loan within 1 month, then you can safely take a payday loan. If you are not sure about the timing of receiving the money to repay the loan, or the terms are extended for 3-4 months, then it is better to contact the bank.

Myth #3: Microfinance institutions “knock out” overdue debts from clients

Another well-known myth is that microfinance institutions are almost criminal organizations who use force to collect debts from non-payers. It is not true. Microfinance organizations have nothing to do with the above. They operate within the law. Some lenders maintain their own collection services – in such cases, companies operate in strict accordance with the code of ethics adopted in self-regulatory organizations. Medium and small microfinance institutions often do not have special departments for interaction with non-payers. Such companies transfer overdue debts to collection agencies, a small part of which do not always work correctly with debtor borrowers. Also, in many ways, the format of communication between collectors depends on the debtor since in fact there are irresponsible clients who from the very beginning knew they were not going to repay a loan at all.

Recent legislative changes regulate the work of collection services, so violations in this area are very rare.

Myth #4: You can borrow only small amounts

Another common misconception is that you cannot borrow more than $500. In part, this is true. People with bad credit history can expect to receive small loans. But many microfinance organizations are ready to issue up to $1,000 (and sometimes even up to $2,500). These funds can be enough to cover the following expenses: purchase of household appliances; car repair; treatment; wedding costs.

If you are a repeat customer, you may also get discounts and advantageous offers, as well as an increase in the loan limit.

By the way, payday loans can be used to build your credit.

Myth #5: Payday loans are used only by unreliable people

Many people think that microfinance institutions are contacted only in case of emergency. This assumption creates the myth that only disadvantaged citizens take payday loans in microfinance organizations, but this is not so.

According to statistics, the clients of microfinance institutions are citizens with an average income or slightly below average income. Most often, these are employees of the public sector or small private organizations. As practice shows, these borrowers take short-term loans for:

  • car repair;
  • home improvement;
  • personal or unforeseen needs;
  • medical treatment;
  • purchase of household appliances;
  • education or courses;
  • etc.

Myth #6: Approval is 100% guaranteed

There is an opinion that microfinance institutions issue online loans to absolutely everyone, including the unemployed and people leading an asocial lifestyle, etc. This is not true. Each lender has its own methodology for assessing the solvency of borrowers and calculating the maximum amount that can be approved for each specific client. Many companies have successfully implemented special scoring systems that automatically assess the reliability of a potential borrower. In the application process, lenders request information about the income, expenses and obligations of the client, place of work and number of dependents. They also check if the person really works in the specified organization for a sufficient period of time. Microfinance institutions do not issue loans to people who, for objective reasons, cannot fulfill their obligations on time. This rule also applies to the approved amount: often lenders approve smaller amounts than requested by the borrower, realizing that some clients may overestimate their capabilities. Yes, payday loans are available to disabled people, students, those with bad credit, seniors and the unemployed – but the person must have a source of income (wages, disability benefits, pension, scholarship, etc.).

Myth #7: Nothing happens if you don’t pay a payday loan

People who are “harassed” by collectors do not give up, leave for other cities and refuse to pay the debt. It is erroneously considered that online lending is illegal. But the truth is that the online contract has the same legal force. Therefore, the microfinance organization has the right to file a lawsuit in court to recover the debt from the client. That is why, you must always repay your payday loan as agreed with the lender!

Myth #8: The goal of the payday lender is to drive the client into debt bondage

Some borrowers are sure that all people who contact microfinance institutions eventually fall into a debt hole. In fact, payday loans, just like bank loans, are voluntary. By law, both banks and microfinance institutions must indicate all information about the product in the contract. Then the matter is small: the client must read it carefully and find out everything that is unclear.

In most cases, borrowers fall into a debt hole due to banal ignorance of the loan issuance mechanism and low financial literacy.

When approved, some clients forget to read the terms of the contract. We recommend that you do this. You should also assess soberly whether you can repay the loan on time.

Myth #9: Microfinance institutions sell customer data

Microfinance institutions treat their clients’ data in accordance with the privacy policy. Read the Data Processing Agreement carefully and set a restriction on the transfer of information to third parties in advance. The privacy policy document must also contain a description of the process of deleting data from the lender database – this is the legal right of the borrower. We also recommend that you check if the lender website uses encryption. The easiest way is to see if there is a closed padlock icon in the address bar.

Myth #10: Self-employed people cannot get a payday loan

Microfinance companies are ready to work with self-emplyed people. Private entrepreneurs may also need extra cash for unforeseen expenses, so they may apply for online loans too. Many individual entrepreneurs need a small loan for the development of their business. It is much more convenient to get a payday loan because, unlike banking organizations, payday loan providers have a more loyal attitude towards their borrowers. To get a loan, you just need to provide basic documents.

High competition in the lending market is explained by the desire of lenders to fully satisfy all the wishes of their clients. Each individual type of loan has both advantages and disadvantages. And each loan may be suitable only for some special cases. Therefore, before applying for a payday loan, try to explore all possible lending options and choose the right one. Properly selected lending conditions will not only solve your financial problems but also help to avoid new ones.


There is nothing wrong with payday loans if you approach lending wisely: choose a loan for a specific situation, read the contract carefully and repay your loan on time. Contact a microfinance institution if you need a small amount that you can return in a short period.

Remember that the work of microfinance institutions is regulated by law. In order not to run into scammers, check if the lender has a license to issue loans in your state. If you choose a trustworthy lender, there is nothing to worry about. The main thing is to fulfill the terms of the contract.

Do not rely on myths and common misconceptions, instead study reviews and improve financial literacy, which will help you avoid falling into a debt hole!