How do Payday Loans Work?
A payday loan is a short-term loan that will help you meet your financial obligations before the next paycheck arrives. The annual percentage rates on these rather small loans are typically higher than the regular bank rates, and payments are due within two weeks — or before the next payday.
Payday loans are not for those who are not ready to pay them back on time. The overdue rates can be extreme, and if you’re not responsible enough, they might end up costing you even more than you expected. When you apply for one, make sure you understand what you’ll get and what you’ll be asked to do in exchange.
Payday Loans System
Personal and other consumer loans are not the same as payday loans. Depending on where you live, you can apply for a payday loan online or at a payday lender’s physical location. Different states have different rules on payday loans, restricting the amount you can repay and the amount of interest and fees the lender can demand.
You may collect cash, a check, or get the money deposited to your bank account when you’ve been accepted for a payday loan. The debt must then be repaid in full, including the finance fee, on the due date, which is usually within 14 days or by your next paycheck.
Payday loans have a funding fee that is usually dependent on the amount borrowed. Since payday loans have naturally short duration periods, these fees add up to a high annual percentage rate (APR). Payday loan APRs are usually 400% or higher, as per the Consumer Federation of America.
The Economist predicts that 2.5 million American households per year take out payday loans, despite the high rates. This can be attributed to several factors. One reason is that many borrowers who take out payday loans don’t have any other funding opportunities. They may have bad credit or no wages, preventing them from obtaining a personal loan.
Another factor may be the lack of substitutes. Some individuals, for instance, may be reluctant to seek help from relatives or friends. Substitutes to payday loans do exist, but they aren’t necessarily easy to come by.
Payday Loan Alternatives
You can consider the following options instead of taking out a payday loan:
- Personal loans. However, to be able to borrow from conventional lenders, you must first build credit.
- Keep a credit card available in case of an emergency but be aware of high overdue rates.
- For the lenders, work out a payment plan or a loan modification.
- Examine your checking account’s overdraft security options.
However, payday loans remain the best financial assistance option for many people since the approval process for payday lenders is easy. For instance, a lot of lenders don’t run a background check or even ask if the borrower has the financial resources to pay the loan back.