Are you wondering about a Payday Loan?

25 August 2018 929 Views

Summary

A personal short term loan or payday loan is a short-term loan with a high interest rate. The maximum amount that can be borrowed varies from state-to-state. However, it is normally $500 or less. Payday loans are often used to cover emergency financial situations and bridge the gap between paychecks. It’s nice to be able to get cash when you need it, but it’s important to remember that you have to pay back the amount you’ve requested plus interest.

The Consumer Financial Protection Bureau (CFPB) explains on their website that these loans are normally for small amounts, but that, in return, they give the lenders access to the borrower’s checking account or require that the borrower write a check for the full balance in advance, so that the lender can deposit it when the loan comes due. Additionally, payday loans have high-interest rates. We recommend that potential borrowers check state laws and regulations and any other factors that might influence charges so that they understand what they’re agreeing to when they enter into a payday loan agreement.

What Exactly Is a Payday Loan?

There are many names for this type of loan: payday loan, cash advance loan, short-term loan, personal loan, deferred deposit loan, and post-dated check loan. You can apply for a payday loan online or in person. Whether you apply online or in person, the process is essentially the same: you provide some personal and financial information, apply for a loan of a specific dollar amount, agree to a repayment schedule, sometimes pay a fee for the loan, and then receive the cash or a deposit in your checking account.

There are several factors that influence the overall amount you can borrow, but lenders normally don’t check your credit score. Payday loans can be very costly. Loan amounts generally range from $50 to $1,000; it all depends on state laws. Fees also depend on state laws, but the structure might be something like $15 per $100 borrowed, and some states may cap how high the fee goes. Because payday loans are unsecured (require no collateral from the borrower), they have high-interest rates.

How Do Payday Loans Work?

Let’s imagine that your car broke down and that you need to borrow $300 for the repairs, since you need to use the car to drive to work. In order to get a payday loan, you first write a post-dated personal check for $340: the amount you need, plus a $40 finance fee, made payable to the lender.

You have to enter this information online when you apply for the payday loan. Normally, if everything is okay, the application is approved within 24 hours. So, the lender advances you $300 for a set period, usually 14 days. After that period ends, you will have to either pay the lender the $340 in cash, let them deposit the post-dated check that you wrote, or write another post-dated check for the whole amount, plus another finance fee.

If you aren’t able to pay the debt in full at the end of the defined term, you will be charged additional fees.

Who Uses Payday Loans?

On average, twelve million Americans use payday loans every year. Normally, any individual with a checking account and a steady income can obtain a payday loan. However, it is most common for borrowers who don’t have access to credit cards or don’t have savings to use such kind of the loan. It is common for people who run into sudden emergency financial situations to use payday loans.

What are the Benefits of Payday Loans?

Payday loans can be a good tool for quickly and easily borrowing cash when something unexpected happens, especially if there are no other financial options. For example, a person might use a payday loan for an immediate and temporary financial need such as a medical bill, a car fix, home repair, or another one-time expense. Payday loans are helpful for individuals who don’t have credit cards or savings. Because the loans do not require a traditional credit check, they are easy for people with financial problems or a poor credit score.

What are the Risks Behind Payday Loans?

#1 It is highly recommended to pay back a payday loan as soon as possible. Many people get into trouble with these types of loans when they are unable to follow the payment schedule. In such cases, the borrower is charged with expensive additional fees.

#2 It is very easy to get into a debt cycle by taking out a new payday loan in order to repay the previous one. This often leads to bigger financial problems.

What are the Laws and Regulations?

Some states prohibit short-term loans. Other states have specific laws that regulate this sector of the market. Known as “usury laws”, these regulations define lending terms and interest rates. Some states also have laws that regulate the amount a payday lender can lend to a borrower and how much interest they can demand. These laws vary widely. Payday lenders often work around these regulations by partnering with banks based in other states, such as Delaware. It is very important to acquaint yourself with these laws and understand your rights and obligations before taking out a payday loan.

Should I Apply for a Payday Loan?

If you would like to apply for a short-term loan, first consider all the pros and cons, check to see if you have other options, and then build a plan.

Alternatives to Payday Loans

  • Negotiate a payment plan with your creditor
  • Charge the amount to your credit card
  • Ask for an advance from your employer
  • Use your bank’s overdraft protections
  • Obtain a line of credit from an FDIC-approved lender
  • Borrow money from your savings account
  • Ask a relative to lend you the money
  • Apply for a traditional small loan
  • Ask your creditor for more time to pay a bill
  • Use a cash advance on your credit card

If you have evaluated all these options and decided that a payday loan is right for you, be sure to understand all the costs and terms before you apply. Borrow just the amount you need i.e. an amount that you can pay back in its entirety with the money from your next paycheck. When you get receive your next paycheck, your first priority should be to pay back the loan as soon as possible.

You can apply to a network of our payday loaners here.

What is the Best Way to Prepare for a Financial Emergency?

Nobody can predict an emergency; it is always an unfortunate surprise. The most common way to react to a financial emergency is to use a credit card. However, the wisest way is to plan ahead by making a savings account and regularly transferring a certain amount of money to it. That’s the best way to prepare for an uncertain future.

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