How does a payday loan work?

How does a payday loan work?

As per a study done by Federal Reserve, an average American does not even have $200 as their contingency fund. In simple words, around 50% of the population is living their life from one paycheck to the other. There are times that people run short of money during the last days of the month. With no savings and no money in hand, it becomes quite challenging even to pass a day. This is the time when payday loans come to rescue.

What is a Payday Loan?

A payday loan is one of the fastest mediums of getting cash in hand before the next paycheck arrives. There are a variety of sources through which you can get these loans by filling your personal details and financial information, similarly the way you apply for other kinds of loans. A payday loan is a short-term loan for which you need to provide the amount you require with some loan fee. The amount of loan sanctioned to you depends on various aspects, but thankfully your credit rating does not play any role in these loans.

The loan amount can vary from $50 to $1000, and the interest rate on these loans are pretty high compared to other loans (varies from state to state). Since the purpose of the loan is to solve your necessary need and so that you could manage your days until the next payday, hence, the cost of borrowing is high.

How can you get the loan?

Payday loans are usually given by sources like payday loan store or small business. You can easily apply them online by entering your personal and financial information. But you also need to give them a post-dated check as collateral. The term of the loan is from 15 days to 30 days (some businesses might even have extended loan term). Once the loan period is finished, you are required to pay that amount in full with additional fees. Not paying the loan amount timely can result in additional charges.

Benefits of Payday Loans

As mentioned above, payday loans are a fast medium to conquer your immediate financial need, especially when you don’t have other options to depend upon. It is very helpful for people who have difficulty in making ends meet each month. As there is no credit check involved with these loans, therefore, for people who have bad credit history can get huge help from these loans.

Are you eligible for a payday loan?

As long as you have a running checking account and a regular job to pay it back, you are eligible to apply for this loan. The biggest advantage of these loans is that you can borrow them even if your credit ratings are bad.

Risks attached to short-term loans

Payday loans are a fast and quick way of receiving cash. But one should keep in mind that they are also expensive. Therefore, it is always recommended to pay off your loan amount as soon as possible. It is seen that people don’t take these loans seriously and don’t pay them timely. As a result, you are charged with an additional fee that makes it all the more difficult for you to pay back, and you get stuck in the payback cycle for a long period of time. Payday loans charge 400% of annual percentage rate, which is enormously high compared to other types of loans. So, it is better to depend on your credit cards rather than these loans.

Also, since the money is quick, people get reliant on these loans. Borrowers don’t understand that financially they are paying much higher payback amounts, which is making a hole in their earnings. Therefore, you should only look towards these loans until you don’t have any other option to depend upon.

Should you take a payday loan?

This is a question you need to ask yourself before even applying for the loan. Just do a self-check and see if it is so urgent that you won’t be able to make even one step without it. These loans are good if you have any medical emergency but not a great idea for easing out your regular financial burdens.

Rather than depending on payday loans, try to manage your funds better so that you don’t land up in this situation. Save some money every month so that you can use it whenever you need in an emergency. You can even have credit cards as your backup for such situations. So, before depending on these loans look for alternative options for borrowing money like taking advance from your office or borrow money from a friend/relative, ask your bank to provide your overdraft facility, etc.

Despite all the efforts, you still reach a point where you require a payday loan, do a thorough research about lenders who charge a low rate of interest and also negotiate a payment plan with your lender.