What you need to know about payday loans
Payday loans are a type of short-term, unsecured personal loan that is normally due on the borrower’s following payday. They can be an enticing choice to rapidly obtain the cash you need, but the majority of the time, their concealed costs and exorbitant rates can place you in a cycle of debt that is difficult to escape.
Depending on the state in which you live, the interest rate that you will pay can be anywhere from 150 to 650 percent (or even higher). In addition, the probability of failing to pay back a payday loan is rather significant; therefore, it might be in your best interest to seek for an alternate funding source in order to get over a financial hump.
What payday loans are
Payday loans are short-term, unsecured personal loans that typically have a maximum value of $500 and must be repaid by the borrower no later than their following payday (or within two weeks). Payday loans typically have significantly higher interest rates compared to traditional personal loans and can come with a multitude of hidden fees. This is due to the fact that these loans are frequently a last-ditch option for borrowers who have poor credit and need money quickly. Because of this, payday loans have a reputation for being controversially predatory, particularly among borrowers who have a history of credit problems.
According to Jeff Zhou, co-founder and CEO of Fig Tech, a company that provides payday alternative loans, the best way to identify a payday loan is any time you borrow money and you pay back the entire amount at once, normally on your payday. This is the case with all payday loans. If the lender isn’t interested in your credit history, this could be a sign that you’re dealing with a payday lender. Additionally, the majority of payday lenders do not perform credit checks.
The procedure for cash advance loans
The application process for payday loans can normally be completed either in-person at a lending establishment or online. They are subject to regulations not just at the state level but also at the federal level. However, a number of jurisdictions have passed legislation that places restrictions on the fees or interest rates that payday lenders can charge, while other states have outright prohibited the use of payday loans.
Verification of credit
Although it is less common with payday loans, the payday lender may request a hard credit check to view your credit score in order to determine your rate and terms. However, this is not very common with payday loans. In most cases, the lender will also demand evidence of your income and the day you are paid.
When it comes to payday loans, on the other hand, your credit score does not play as big of a role because the lender has the ability to deduct the necessary amount directly from your bank account when you earn your next paycheck. Payday lenders do this to reduce the amount of risk they take on. They are also able to determine the principle amount of your loan by using a proportion of the income they anticipate you will make.
Repayment
There are a few different ways in which you can repay a payday loan. You might provide the lender with a cheque that has a future date on it so that it can deposit the funds on that date. You also have the option of authorising the lender to withdraw the funds directly from your bank account after you have been paid by your employer or have started receiving benefits such as income from Social Security or a pension.
Charges and various other expenses
The loans offered by payday lenders often do not come with a standard rate of interest attached to them. Instead, they will compute the fees associated with the loan and add it to the total amount that you are responsible for repaying. Consider the following scenario: a payday lender charges a fee of $10 for every $100 that is borrowed. This means that you would be responsible for paying $50 in fees for a loan of $500, and the full amount of $550 would be payable on your subsequent payday.
A “rollover” is an option that a lender may present to you if they determine that you won’t be able to make the payment when your next payday arrives. With a rollover, you can defer paying the full amount of the loan until your next paycheck and only have to pay the fee for the initial borrowing until then. However, you will still be responsible for paying the full amount of the original loan plus the fee for the rollover amount. These costs can quickly accumulate as a result of the fact that many payday borrowers end up rolling over their accounts since they are unable to pay the whole amount when it is due. Because of this, getting out of the cycle of debt caused by payday loans can be challenging.
Compare and contrast personal loans with payday loans
There are some parallels to be seen between a cash advance loan and a personal loan. Both are considered to be unsecured loans, which means that they are not secured by any collateral in the same way that a mortgage or an auto loan would be. However, you should be aware of a few significant changes before moving forward.
The terms of borrowing
Personal loans often have periods that range from one year up to many years, with the minimum term being one year. A payday loan often has a shorter repayment period. Payday loans typically come with a short-term repayment requirement of a few weeks or less. Your subsequent paycheck will often be when the whole payment, including all interest and fees, is scheduled to be made.
Amounts
A payday loan is normally for a lower sum, typically for an amount that is less than $500. Borrowers of personal loans often need significantly more money. The typical outstanding balance on a brand-new personal loan was $7,104 as of the first quarter of the fourth year of the 21st century.
Payment
The monthly payment for a personal loan is often made online, and it is deducted directly from the borrower’s bank account. If your check bounces or you are unable to pay the full debt on the due payday, you may be obliged to roll the loan over to the following payday, which will result in additional costs being assessed to your account.
Rates
There are many different kinds of personal loans, but the most of them will have interest rates that are significantly lower than those of payday loans. Your interest rate will be established by the lending institution, the total amount that you obtain, as well as your credit score.
Payday loans for those with poor credit ratings
There is a significant number of payday lenders who do not do any kind of credit check at all. They are aware that the majority of potential borrowers in search of payday loans do not normally have the finest credit. Instead, lenders will charge higher interest rates and other fees in order to compensate for the increased credit risk.
If your payday lender does not require a thorough credit check and you are able to pay back the full amount by the due date, then taking out a payday loan will not have a negative impact on your credit score. It’s possible that your credit score will go down slightly if your lender insists on running a comprehensive credit check on you.
However, if your check is returned unpaid or if you are unable to pay the full sum on the date that is needed, the amount may be transferred to a collection agency, which will have a negative impact on your credit.
The dangers of getting a payday loan
Payday loans, despite their utility for obtaining cash quickly, come with a number of inherent hazards.
Costs of borrowing that are quite high
Payday loans, with their extremely high interest rates and a variety of hidden costs, have the ability to ruin both your financial health and your credit score. According to Zhou, “Payday loans have a high interest rate; nonetheless, the most significant risk associated with payday loans is the fine print.”
There may be adjustment costs, required subscription charges, or early repayment fees hidden in the fine language, all of which have the potential to quickly pile up. To give you an idea, the typical borrower will shell out $520 in additional fees for a two-week payday loan that costs $375.
Risk of default
According to Zhou, “the greatest risk associated with payday loans is when they transform from a temporary solution to a long-term burden on your financial situation.” Fortunately, just 14 percent of those who take out payday loans end up being unable to pay back the money they borrow.
Rollover costs that are excessively high
If you do not have a plan to pay off your payday loan in full by the due date, you will be required to roll over your loan. This means that you will be responsible for the principal balance in addition to any additional fees and interest that has accrued since the original loan was rolled over. This is a vicious cycle that could put you in a position where you have to pay hefty interest rates on your debts in the future.
Other financial options than pay day loans
It’s possible that you won’t be able to secure a standard bank loan to satisfy your urgent need for cash, but if you use some of these strategies to make your money last until your next paycheck, you might be able to avoid getting a payday loan altogether.
Use a credit card
You could charge your spending to your credit card as long as it does not have a limit that is currently being exceeded. In addition to having an interest rate that is most likely going to be lower than that of a payday loan, you will have thirty days to pay off the balance on your credit card before it starts accruing interest charges. If you can pay off the balance before your next payday, using a credit card can be a cheaper alternative for you.
Make an application for a personal loan via the internet.
There are a few online financial institutions, such as LendingClub, that offer loans for amounts as low as $1,000. A minimum credit score of 580 FICO is required to apply for an Avant personal loan. The estimated APR ranges from 9.95 percent to 35.99 percent, which is a significant reduction from the estimated 400 percent you’d be facing if you applied for a payday loan. You may examine the rates of many different lenders for personal loans online, and doing so won’t have any effect on your credit score. Once your application has been reviewed and accepted, it is feasible for the funds to be transferred to your account within one business day.
Think about joining a cooperative bank.
Credit unions provide an alternative to payday loans known as PALs. With a PAL, you can borrow between $200 and $1,000 for a term of anywhere from one month to six months. The annual percentage rate has a maximum of 28 percent. However, in order to be qualified to apply for PALs, you have to have been a member of the credit union for at least one month, which means that they are not the ideal option if you need money right away.
Inquire amongst close acquaintances and loved ones.
Even though your relatives and friends may not always be able to lend you money, they may be able to assist you in other ways that can bring your overall costs down. For instance, they might offer to let you wash your laundry at their house, which would save you money at the laundromat, or they might prepare dinner for you and give you the leftovers so that you have something to eat until your next paycheck arrives. Don’t be embarrassed to talk about the difficulties you’re having financially with the people you care about. It takes a village to get things done, and one day, you’ll be there for them as well.
Find ways to earn extra money.
There are a few different things you can do to fast produce additional revenue. One option to bring in some additional cash is to sell some of the things you own that you don’t really need. Do you have any old clothing that you could donate? You might try selling them online or at second-hand retailers in your area. You may also consider renting out a room on Airbnb, selling any unused gift cards you have for cash, or cashing in any rewards points you have accumulated on credit cards that you haven’t used yet.
Make an advance request to your employer.
Check with your employer to see if you may get a paycheck advance to help you get by until your next salary arrives. It’s possible that the human resources or payroll department at your company can assist you.
Make a case for leniency, or put off payments.
If you have a balance that is due on a number of different invoices, you should call each creditor and ask for a delay in the payment deadline until you have the funds necessary to settle the debt.
The majority of businesses will either give in to your request for forbearance or figure out a means to accommodate your request to pay your expenses in instalments. It is important to look at areas in which you have the ability to delay or reduce payments in order to make it to your next payday.
Make use of the services for emergency aid.
By taking use of the crisis assistance resources offered in your community, you may be able to reduce other costs in your budget, allowing you to put more money down for a future payment. Here are some possible approaches:
- Food banks in your area: While you wait for your next paycheck, you can cut down on or completely eliminate your grocery cost by making use of the resources that are available at food banks in your area.
- The Low Income Home Energy Assistance Program, also known as LIHEAP, is a programme that is administered by the federal government to assist households in fulfilling their energy requirements.
- Local community service agency: numerous towns and cities are home to charitable organisations that provide assistance to local inhabitants when they are in need. For instance, the Community Services Agency in Mountain Park, California, provides assistance with a variety of costs, including rent, utilities, and costs associated with going back to school. There are several local churches and other religious organisations that provide services that are comparable.
Think about pawnshop loans.
You might be able to get a loan from a pawn shop if you’re willing to put up one of your precious possessions as collateral for the loan. The pawnshop will keep the item in their possession while lending you an amount that is often a fraction of the item’s resale value; nevertheless, the fee that you pay will likely be quite high. You will be able to reclaim your item once all of the payments on this loan have been made. If you fail to make your payments, the pawnshop will eventually have to sell the item in order to recoup the money they’ve lost on it.
However, a pawn loan is an expensive way to borrow money because the annual percentage rates (APRs) for some loans can reach over 200 percent, and the term period for many pawn loans is only thirty days. Because pawnshops do not report your payment history to consumer credit bureaus, the fact that you do not repay the loan will not have an effect on your credit score even if you default on the loan. However, the object that you pawned will not be returned.
The bare essentials
When used appropriately, payday loans can be extremely useful financial tools. If you have a good track record when it comes to your finances but are in need of some additional funds to cover an expense, you might want to consider applying for a payday loan. It is important to keep in mind, however, that payday loans do come with some risks. If you do not feel confident in your ability to repay the loan, getting a payday loan could damage your credit score and even lead to legal trouble for you.
You should investigate all of your other loan alternatives first, including those offered by banks and credit unions, in order to determine which one has the most favourable terms before applying for a payday loan. Make sure you are familiar with the terms of the loan before applying for one, since the potential drawbacks of payday loans frequently exceed the advantages.