If you are interested in getting a Payday Loan, make sure you understand the costs and risks. It might interest you to know that there are information about Payday Loans you may not know.
Though it is a short-term loans that is often used to get through a rough spot. However, there are very few situations in which it actually end up being helpful.
In this article, you will get important information about Payday Loans.
What is Payday Loan?
A payday loan is a small short-term loan a person takes out at a high interest rate. The person does this with the understanding that the debt will be settled in a short amount of time. It is also a type of short-term borrowing where a lender will extend high-interest credit.
This high-interest credit is based on a borrower’s income and credit profile. It’s principal is typically a portion of a borrower’s next paycheck. This loan is also called cash advance loans or check advance loans.
This loan amounts generally range from $100 to $1,000. It is important to know how the name ‘Payday Loan’ came about. It came about because often the loan is repaid when the person’s next paycheck comes in.
Some Features of Payday Loans
Below are some of the characteristics of Payday Loans;
High Interest Rates
These loans charge high-interest rates for short-term immediate credit. Most often, Payday loans are for no more than a few hundred bucks. These bucks need to be paid back within a couple of weeks.
The interest rates depend upon which state the borrower is in anyways. Some states do not have limits on the rates that businesses can charge for payday loans.
Rates can be as high as 500% or more for annual interest rates in certain states. Even among states with limits imposed, the annual interest can reach 36%.
It has a Process
To get this loan, you typically write for the amount you are borrowing, plus a fee. You might leave the request with the lender, and they cash it once you are ready to repay.
It can be Rolled over
If you cannot repay your payday loan when it is due, you can roll it over. This roll over allows the loan to be extended.
In other words, you do not have to repay it, but fees keep accumulating. Please know that some states regulate roll-overs.
They do this by outlawing them or limiting the number of times you can renew. Thus, before taking out a payday loan, review the laws in the state where you live.
Payday Loans are Expensive
These loans are significantly more expensive than traditional loans. You may end up paying an annual percentage rate that exceeds 100 percent.
For instance, you might pay a $20 fee to borrow $100 for two weeks. Depending on all the terms, that calculates to an APR of more than 500 percent.
How to take out a Payday Loan
While toying with the idea of taking out a payday loan, you may have some questions. Questions like: How do Payday Loans work? Are they as bad of a deal as people say they are? Are there better options out there?
The first and second questions have been attempted. The last will be addressed too. However, on how to take a out a Payday Loan, please note. First, you need to find a Payday lender.
Finding a lender that offers this type of loan is easy. It is easy because the loans are highly profitable due to the high interest rates. Once you have settled upon a lender, you have to meet the requirements. Often, the requirements include:
- A pay stub to show employment.
- Identification to show the borrower is at least 18 years old.
- A checking account at a bank.
- Proof of residence in the state they are trying to get the loan.
Some Risks of Payday Loans
Below are some of the risks associated with Payday Loans;
- Payday loans can bury borrowers in a pull of fees and interest. This occurs when they are not paid back within the set loan term. The probability of this happening is high.
- It can create a cycle of debt in which people take out more payday loans to pay off. Almost one-fourth of those who seek these loans live off of retirement income or public aid.
- If you borrow $500, for instance, that fee can rise to $75 for a two-week loan. That amounts to a lot of interest and fees.
Short-comings of Payday Loans
One of the short-comings of payday loans is the cost. Due to extremely high fees, they do not help you solve the real problem.
If you are having persistent financial difficulties, payday loans only make things worse. You are paying an extraordinarily high rate of interest. This means that your expenses are just going up.
As a short-term strategy, payday loans might get you through a rough patch. As a long-term strategy, payday loans will pull you under.
Bank and Payday Loans
It might interest you to know that banks have also moved into the payday loan industry. Please note that, traditional bank loans require you to qualify based on your credit, income, and assets.
In other words, bank Payday loans are no better than any other. They may go by a variety of names, but they are still expensive and risky. In fact, Payday loans from banks can even be worse than the loans you get at a Payday loan store.
This is because the bank has access to your checking account. Also, you have to agree to let them pull funds from your account to repay the loan.
Alternatives to Payday Loans
If you are contemplating on using a payday loan, consider some alternatives:
- Build up an emergency cash fund in your savings account.
- Build credit so you can borrow from mainstream lenders.
- Keep an open credit card for emergency expenses.
- Get a signature loan (or unsecured loan) from your bank or credit union.
- Pick up a part-time job for extra cash.
- Negotiate a payment plan or loan modification with your lenders.
- Investigate overdraft protection plans for your checking account.
- Try peer-to-peer lending services for a better deal.
Legal Status of Payday Loans
It will interest you to know that some states no longer allow borrowers of these loans to roll over their debt. However, some states continue to let borrowers roll over their debt. Others cap the rollover amount at a low number.
Three of these states (Maine, Oregon, and Colorado) allow lower-cost payday lending. Borrowers still face higher interest rates and fees with payday loans in these states. This does not mean they are nearly as high as many other states.
High-cost payday lending is still allowed in 32 states. But there are still some restrictions in many of those states. Washington only lets borrowers take out eight loans a year, for instance.
In a Nutshell
In summary, please note that, Payday loan is used by people who feel they do not have another choice. Some people think getting it is less intimidating than visiting a traditional bank.
Though these loans can be a quick way to get a loan, they are more expensive. This is why you should always exhaust every option you have before taking out a payday loan.