What Is a Payday Loan?
If you have ever been in a situation where you needed money quickly, this loan could’ve been your perfect option. A payday loan is a type of short-term, high-interest loan often taken out by people who need money instantly. With this loan, you can borrow small amounts of money that are often used to cover smaller expenses like groceries or rent. Here, we will define payday loans and provide you with information on not only how they work but also some pros and cons they have.
They are typically short-term loans providing you with a smaller amount of money often used just to cover everyday expenses like food, rent, or some bills. There are many lenders offering it and you can also get payday loans online if you prefer not to go to a traditional bank. All you need in order to obtain it is a good credit score and an active bank account.
These loans can range in terms of APR, or annual percentage rate, and can have fees associated with them. They are not recommended for long-term financing, as they can lead to debt problems in the future.
Interest rates on payday loans can range anywhere from around 25% to over 300%. This is not that uncommon with loans you can get fast. Typically, lenders put higher interest rates if they have to issue funds fast and cannot do a thorough check to assess their risks. Because of this high interest rate, it’s important to be careful with choosing a lender and the amount you need to borrow. Don’t put yourself in the worse financial situation by taking out more money than you are able to pay back. If you default on your payday loan, your lender can take some of your assets, including your home and car.
In case you need cash quickly but don’t want to risk using an unsecured or even higher-interest loan, a payday loan might be the right fit for you. Anyhow, be sure to do your research on other available options and understand the risks involved before taking out any loan.
How Does a Payday Loan Work?
A payday loan provides the borrower with a smaller amount of money used to cover unexpected expenses. Available amounts vary between $100 and $1,000. To receive a loan, borrowers must provide documentation verifying their income and current expenses. Payday loan borrowers are typically required to pay back the loan within 14 days, with interest added to the total amount they took out.
Payday Loans: Advantages and Disadvantages
When you are in a need of emergency funding to cover some unexpected expenses, a payday loan can look like a great option. But before you take one out, it’s crucial to know all the different advantages and disadvantages of them. Here’s a look at both sides to help you make a decision.
Advantages
- They’re quick and easy to get – It will only take them a couple of hours to be issued from a bank or online lender.
- They’re flexible – There is no limitation to what you can use these funds on. It can be for any type of expense like groceries, rent, and car repairs.
- They’re convenient – Payday loans are often available 24/7 and can be accessed quickly and easily. They are also same-day loans, which means you can get the money you need right away without having to wait around for a check to arrive in the mail.
- They’re affordable – If you dedicate even a little bit of time and find a good lender, you can get a lower interest rate which will make this loan cheaper than other types available.
- They have short-term – This means that you won’t have to worry about accumulating debt over time because you will pay them back in just a few weeks.
Disadvantages
- They’re risky – Because payday loan terms are often really short, it’s possible you will not be able to pay it back on time.
- It’s easy to get trapped in a cycle of debt – If you don’t consider other types of financing and use this as your long-term solution, it’s easy to get trapped in this payday debt.
- Some lenders use questionable collection practices – If you halt on a loan, the lender will repossess something of yours so be careful and discuss this before signing anything.
- High interest rates – in case you don’t want to browse and get stuck on the first offer you get, you can be trapped in a loan deal with really high-interest fees.
What Is the Cost of Payday Loans?
When it comes to borrowing money, people turn to payday loans for a quick and easy solution. But often payday loan borrowers don’t look at the actual cost of these loans.
These loans can be accessed in one lump sum on payday. The cost of a loan varies depending on the lender you choose and the interest can go as high as 400% APR. Taking a payday loan can mean for example that for every $100 borrowed, the borrower will pay an additional $400 in interest charges if they settle for a bad deal.
Though the interest rates on payday loans are high, they can be cheaper than other forms of debt such as credit cards or installment loans. This is because payday loans are typically given out in amounts around $500, which means that there’s a lower risk of debt accumulation. However, don’t forget that payday loans are not recommended for long-term financing and should be used only as a temporary solution for a current financial crisis.
How Do Payday Loans Affect Your Credit?
This short-term, high-interest loan can be received from a credit or debit card company. Payday loans are often called “cash advances,” because you receive the money in cash rather than having it deposited in your bank account. This loan typically has a duration of three to six months but can be shorter or longer depending on your needs.
Considering that payday loans are so high-interest, this can significantly affect your credit score. In fact, according to the National Foundation for Credit Counseling, payday loans are one of the top sources of consumer debt that lead to bankruptcy. That’s why it’s crucial to be aware of these risks before taking out a loan and to be careful when planning to use your credit or debit cards for short-term financial needs.
In case you’re currently struggling to make ends meet and need quick cash, we suggest you try looking for alternate options such as emergency funds or borrowing money from family or friends.
Is Taking Out Payday Loans a Good Idea?
Taking out this loan can feel like taking out a small break from your bills. But should you do it often? If you only need a couple hundred dollars, a payday loan may be the best option for you. These loans are typically issued within a day so they will give you the necessary funding to help you in your current crisis. But if you’re struggling to pay off your bills or rent each month, a payday loan may not be the best solution for this. Instead, try to get a financial advisor to help you budget everything.
Alternatives to Payday Loans
There are many alternatives to payday lending available if you need short-term financial help.
One of the best options out there is to borrow money from family or friends. In this case, you can even get more money than with payday loans and you can negotiate the terms. Many people you actually know will be willing to lend you some money and maybe even see it as an opportunity to make some for themselves from your interest rate.
Another option is to look for online lenders offering similar loans but with better terms and lower interest rates. This way you can also find lenders that offer longer repayment terms or give more money so this can actually suit your personal situation.
Finally, you could think about using a credit card to cover your short-term financial needs. This can be less convenient, but it could end up saving you some money in the long run. If you use your credit card responsibly, you should be able to pay off the entire balance each month without any significant fees or interest charges.
Final Thoughts
If you need money quickly and can’t wait to get a more traditional loan, payday loans can be a good way to get this needed funding. Here we discussed everything you must know about them before even thinking of taking one out. Even though we cannot tell you what to do, we suggest you look at alternatives and find the best option for your needs and goals. Talking to a financial advisor can help in making the best decision you can afford.
