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Why do people take out Payday Loans? How do they work?

Payday loans – have you used them? Before sending an application, it is vital to weigh up the various options at your disposal. Ideally, you want to try and aim for low-interest loans. However, it becomes challenging when you decide to borrow money with interest.  In most cases, the decision to borrow money is because of an emergency – maybe bills need to be paid or there’s an unexpected expense. When this happens there isn’t much time to shop around for interest rates. In an ideal world, consumers would outright decline high-interest rate loans in and only be on the lookout for other, better options.

However, interest loans continue to gain popularity for several reasons. For instance, loans with no credit checks attract many consumers. A good example is payday loans. That is why the article started with a question of whether you use them. If the answer was yes, what was the motivation behind the decision to use them, and what has been your experience with them? In this article, we are going to examine payday loans and determine what the maximum interest rate on a payday loan should be.

How Payday Loans work

Payday loans are short term loans initially meant to help individuals when there’s an emergency. The loans are supposed to be paid back in a period of between 2 and 4 weeks. Usually, the loan is paid in one instalment. The fact that the loan is short term is the reason interest rates are quite high. You should never try to make them long term, as the longer you keep them, the more expensive they become.

The interest rate of a Payday Loan

The interest rate of a loan is an essential concept to understand when it comes to borrowing money. We have already established that the rates on payday loans are quite high. Just like with other types of loans, different lenders charge different rates. So, what is the maximum interest rate on a payday loan? The interest rates of payday loans tend to vary between $15 and $20 for every $100 an individual borrows. Payday loans have an average APR of 541%. The minimum rate is around 375%, though this is rare to come across. These rates apply only when the loan is repaid as expected, which is in a period of two weeks. According to recent statistics, around 80% of payday loans are not paid back in time. In case you fail to repay the loan, the rate can continue rising and can even get to 1000%.

The higher interest rates make payday loans very expensive. This is exactly why you are advertised against using them unless it is necessary. The loan can be rolled over but this comes at a cost and makes the loan even more expensive. For instance, a rollover for a payday loan of $100 can attract a charge of $30. This means that if you roll over eight times, you will be required to pay a total of $340. You might feel a rollover idea is ridiculous, but it happens. Remember this is a short-term loan with high interest and is supposed to be paid back in one instalment. To avoid falling short of funds to cover monthly expenses, individuals often prefer rolling over. If this happens, you may end up in a circle of debt, and it can end up consuming you.

So, why do people take out Payday Loans?

Payday loans continue to become more and more popular on a daily basis. The question is – why are they preferred even though they are quite expensive? Even though payday loans can be a burden on your finances, they may be useful in certain situations. Consider the following.

There Are No Credit Checks

Most people are attracted to payday loans because lenders do not subject them to credit checks. Traditional lenders can’t approve a loan application without a credit check. They have to determine the possibility of borrowers repaying the loan within a specific time frame. One of the main eligibility requirements is excellent credit. While there are various bad credit loans, they are also expensive and takes time to be approved because you have to use other means to prove your creditworthiness. In contrast, payday lenders do not focus on credit. If you are of legal age, have a bank account, and can prove income, you are eligible for a loan.

Saves Time

Funds can be accessed within a short time. Unlike with banks and credit unions where you have to wait for several days or even weeks before accessing funds, payday loans are processed within a short time. Some lenders make sure borrowers access funds two hours after the application is approved. This makes them ideal when plagued with an emergency.

The Requirements Are Lesser Compared to Other Loans

Compared to the loan types, the requirements for payday loans are less. As already stated, you only need a bank account, proof of income and to be of legal age to be approved for a loan. Traditional loans have a lot of eligibility requirements and documentation.

The Bottom Line

Let’s be very clear: payday loans are costly, with a minimum APR of around 375%. The maximum APR can be around 541%, though it can increase in the event the payment is not made in time. But if push comes to shove and there’s no other way to pay for an emergency bill or expense, payday loans may be an option.