Taking a loan can be the best way to deal with unexpected emergencies, consolidate debt, or even buy something that you need now. When looking for the perfect loan to take, you will find various options to take. One of the types to consider is a payday loan.
What is a payday loan? What does it constitute? Today, our article seeks to provide four crucial things you should know before you take this type of loan from a licensed lender. Stick around to learn more about this loan type.
1. How a payday loan works
The first thing you need to understand is how a payday loan works. Generally, payday loans are short-term and unsecured personal loans, which the borrower needs to pay when they receive their paycheck from their employer. Typically, these loans are small since they range from $50 to $1,000. The borrower should pay the total balance within two weeks.
Compared to cash advances from your boss, these types of loans are quite different. The lender will charge a particular interest for every $100 you borrow. Various states and federal governments have regulations on the interest limits that the lender should charge. Note that some states ban these types of loans.
2. Requirements for getting this type of loan
Just like any other type of personal loan, you can apply for a payday loan via an online lender or a brick-and-mortar office. Typically, these institutions will demand you provide the relevant personal details, including your proof of income and pay date.
Some lenders will also want to carry out a credit check. However, it’s not common for this lender to ask you for this information, which is why these types of loans do not affect your credit history, especially if the lender doesn’t ask for it. Once they send the money via debit card or check, you can provide a postdated check, or you can ask them to debit your account on your payday. The lender will withdraw the amount you borrowed plus the agreed interest.
Also, note that if your bank account lacks the required amount on the payday, they may have to charge additional fees such as late fees and non-sufficient fees.
3. They can be a debt trap
According to the Consumer Federation of America, 2.5 million households take a payday loan in America. These cash advances from reputable lenders are convenient, especially if you know that you will be getting your payment at the end of the month.
However, they can lead to additional debts, especially if you borrow carelessly or fail to pay the entire loan on your payday. This will lead to rollover charges. Rolling over the loan to the next payday is a problem because the lender will see it as a new loan, which will lead to extra charges. If you fail to pay, they will roll over the loan and add additional fees for the rollover period. Hence, the borrower can fall into more and more debt.
Furthermore, since most lenders don’t check your credit score, they will charge you high-interest fees to cover up the risk they are taking with providing the loan to you. You may end up with more loans than you can afford.
4. Payday loan options
The good thing about payday loan options is that you can acquire some advanced cash arrangements to cater to an emergency. Most Lenders will give the loans a few hours after applying since the loan application process doesn’t require any background checks.
On the other hand, since there are many lenders around your area, take time to know the interest charges on loans that these lenders provide to ensure safety. You can review the ones available on this review on Timesunion.com.
If you feel that a payday loan would be an expensive option for you, a secured personal loan would be a go-to option if you have a good credit score. You can also opt for a long-term unsecured loan, which could turn out affordable for you.
Final remarks
Payday loans are ideal options for people who need urgent access to money. They are a good option if your reason for taking them is logical and doesn’t hurt your financial wellbeing. Otherwise, a payday loan is something you ought to avoid at all costs. Be sure to take your time before agreeing to take this type of loan. They can throw you into more debt traps. You can also seek financial counsel to assist you in making an informed decision.
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