Reverse Mortgage vs. Payday Loan, the Hard Facts

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Reverse mortgage vs. payday loan Reverse mortgages and payday loans have significant similarities and differences. If you're looking for the hard facts, you will find them here. Both reverse mortgages and payday loans can be used when you are in need of immediate money, although reverse mortgages can be drawn monthly too, which would provide long-term financial stability. 

Reverse mortgages are primarily for those of retirement age.

A reverse mortgage allows you to draw money in a lump sum or you can receive monthly payments. Reverse mortgages are common for those of retirement age because it provides an opportunity to starting preparing for retirement living. Often times, retirees will invest in property, RV's, or park model homes so that they can retire without financial struggle. If you are not ready to sell your house but you'd like to purchase something for retirement, a reverse mortgage provides that opportunity.

Reverse mortgages are based on the equity of your home.

In order to receive a reverse mortgage, your home has to be appraised at a significantly higher price than you currently owe on your home. This may not be possible with the current condition of real estate. During the economic recession, homes lost a large majority of their value and their equity quickly plummeted. Before you consider a reverse mortgage, it's a good idea to have the equity of your home appraised so that you can see where you stand financially.

Reverse mortgages have interest that will be added to your mortgage.
Like all loans, a reverse mortgage has an interest rate. This interest will be accrued to your mortgage, so it's important that you keep a close eye on the interest that you are accumulating. Essentially, your reverse mortgage will draw equity away from your home, since your mortgage will continuously increase because of this interest. This makes reverse mortgages unfavorable to some, but if you're not in a position where you feel comfortable selling your home, they may be the perfect option.

Payday loans often earn their money from repeat loans.

Payday loans have a poor reputation among many financial advisers because payday loan companies earn about ¾ of their income from repeat loans. This is often because payday loan companies encourage borrowers to continue drawing loans when they cannot afford to repay their initial loan's fees. 

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This leaves the borrower helpless to the high interest rates of the payday loan and they often struggle to break free from the amount of debt they have accumulated.

Payday loans have high interest rates; the lowest APR cap is 156%. (Texas)
Payday loans have very high interest rates but they are intended to be short-term loans. The lowest annual percentage rate cap is found in Texas and is 156% of the loan. While you would never take an entire year to repay a payday loan, this helps increase the extent of the interest. Payday loans typically have a two week payback period. This means you must recover the funds to pay back the loan and all fees associated with the loan within a two week period.

Payday loans provide short-term financial relief and are typically easy to obtain.
Payday loan companies are not very picky when it comes to accepting borrowers. Unlike banks and financial institutions, credit is not a huge factor when it comes to approval. If you have a bank account, proof of income and a driver's license to identify yourself, it's very likely that you will be approved. As far as we know, there are no payday loan companies that perform a complete and comprehensive credit check. In fact, it's usually harder to obtain a credit card than it is to obtain a payday loan.