Payday loans are short-term, unsecured loans that usually come with high fees and interest rates, and are typically takenaken out between pay periods when you need cash fast.
Here’s everything you need to know about them, including how they work, how to avoid the pitfalls, and what to do if you run into trouble with one of these loans.
What is a Payday Loan?
A payday loan is a short-term, high-interest loan that’s designed to be paid back in full when you receive your next paycheck. It’s typically limited to $500 and you can borrow it for up to three months.
The average annual interest rate on a payday loan is 390%. Payday loans are also often marketed as emergency funds or short-term financial relief, but the truth is that these loans are an expensive way to bridge the gap between paychecks.
More importantly, research has shown that people who use payday loans tend to struggle with their finances long after paying them off because of the vicious cycle they find themselves in.
How Do Payday Loans Work?
Payday loans are short-term loans that you can typically borrow for two weeks. Generally, payday lenders will loan you anywhere from $100-$1,000 depending on your income and ability to repay the loan.
The lender will first verify your employment by asking for your most recent pay stub or other proof of income before approving the loan.
Once approved, you’ll receive the money in the form of a check or direct deposit into your bank account. When it comes time to pay back the money, you’ll have the option to renew it at a higher interest rate (a fee) or return it.
If you’re unable to pay back the loan when due, contact your lender right away so they know what’s going on and how they might be able to help.
If you miss one payment without informing your lender, they may charge late fees as well as an increased interest rate if it is renewed.
Who Uses Payday Loans and Why?
Most people who take out payday loans are doing so because they have been in a financial rut for a while. They need some quick cash, and the only way they can get it is by borrowing from a payday lender.
The other common reason for borrowing from a payday lender is that the person does not have enough money saved up for an emergency expense (ie car repairs).
For these two reasons, most of the people taking out payday loans will likely not be able to repay their debt with just one paycheck.
For this reason, it is very important to do your research before getting a loan, because you want to make sure you don’t end up paying more in interest than what you borrowed.
The Pros and Cons of Payday Loans
The pros of payday loans are that they’re easy to apply for and get approved for. The cons of payday loans are the high interest rates and tight repayment terms.
One should also be aware of possible illegal activity when it comes to a payday loan since many times these transactions happen on the black market with cash only, no paper trail, and no credit check.
Some people may not have access to a traditional bank account or may not be able to obtain a loan from an established lending institution.
A payday loan might be their only option for help in this case. There is risk involved with any form of lending, but there are steps that can be taken to minimize it.
Be sure you know what you’re getting into before taking out a payday loan, understand all costs involved, and make sure you can pay back your loan as quickly as possible.
Are There Alternatives to Payday Loans?
Another option for people with short-term credit needs is a cash advance from their credit card.
These loans typically have higher interest rates than payday loans, so it’s best to use them as a last resort. But if you can’t make your rent or car payment, this may be the best option for you.
And unlike payday loans, these advances don’t require any collateral or give the lender access to your checking account.
Plus they’re usually easier to qualify for and won’t end up costing you an arm and a leg in fees.
However, while this loan will help tide you over until your next paycheck arrives, it doesn’t solve the underlying problem that got you here in the first place.
That means that when next month comes around and your bills are due again, you’ll still need another credit solution.
In cases where low income borrowers cannot pay back their debt on time, lenders often offer a repayment plan instead of going into default.
How to Get the Best Deal on a Payday Loan
When you’re looking for the best deal on a payday loan, there are a few things you should keep in mind.
First, make sure that the loan is from an established and trustworthy lender that has been in business for at least five years.
Second, compare interest rates and fees so that you find out which lender offers the most competitive rates.
Third, if possible, set up automatic payments to your lender so that you can avoid being late on your payments.
And lastly, never borrow more than what you need; try to borrow just enough money to cover your expenses until your next paycheck comes through.
If you’ve already borrowed too much, call your lender immediately and ask them to lower the amount of money that you owe. With this information, you’ll be able to get the best deal when it comes to getting a payday loan!
What to Watch Out for With Payday Loans
Payday loans are an easy way to get money when you need it. However, there are a few things that you should watch out for when taking out a payday loan.
Make sure the interest rate is reasonable and that the payments will not exceed what you can afford.
Also, don’t take out more than one payday loan at a time.
One last tip is to make sure the lender reports your account on time. If they report late or miss deadlines, this can affect your credit score in a negative way.
That said, if you’re careful about who you choose as your lender, then taking out a payday loan could be very beneficial for getting some quick cash.