A payday loan is a short-term, unsecured loan that can be used for any purpose. The borrower pays back the principal and interest on your next payday, usually over two weeks or less, but sometimes as little as one day.
The borrower must provide proof of income, such as pay stubs or tax documents. The lender may also require you to submit a personal and financial statement, like a credit report, to verify your ability to repay the loan. You are typically required to pay the entire loan amount by your next scheduled date of payment, no matter how much money you borrowed. And interest (typically ranging from 35% to 400%) is charged daily, not in advance, which makes these loans particularly expensive.
You can find out if you qualify for a payday loan by calling a local service provider, like LendUp, who connects you with lenders. If you do qualify for a loan, the average APR is 300%.
Types of Payday Loans
There are many types of payday loans available. Some are designed to help borrowers meet their short-term cash flow requirements until they get paid; others allow you to spend less than your income each month so you have more money at the end of the month to cover bills and other expenses. There are also “emergency” loans that allow you to borrow up to $1,500 without verifying your income or employment status.
Here are some examples of common types of payday loans:
These loans are typically for 14 days or less, but some are only for seven days.
Installment loans are made at an agreed upon rate of interest per month, which can range from 10% to 30%. Your payments will normally include both principal and interest.
Rollover loans are extended when you don’t make enough money during the period between paychecks to cover your expenses. For example, if you earn $50 per week ($250 per month) and need $100 for groceries, you could roll over your paycheck and borrow $100. However, because this money isn’t yours, it doesn’t count against your debt limit.
This type of loan is available to people who experience an unexpected expense and are unable to secure alternate funding. Because emergency loans are usually limited to $1,500, consumers are often advised to apply for multiple loans.
Revolving loans are similar to installment loans in that your monthly payment includes both principal and interest. Unlike installment loans, however, revolving loans are allowed to be rolled over indefinitely. As long as there is sufficient collateral, the loan can be extended indefinitely.
There is not just a single type of the pay loan that is available for the people. A person should make the analysis of the various options and choose the one that will give them the fruitful results. A person can achieve the gaols by taking the decision that will turn out to be profitable option for them. They can take the help of the Money-Wise to calculate their spending.
Pros and Cons of Using a Payday Loan
Using a payday loan can be extremely beneficial if you are experiencing a difficult time financially. In fact, if you’re having trouble making ends meet, a payday loan may actually save you money over time. It allows you to cover living expenses for several months, allowing you to avoid being late on rent or utility bills.
However, using a payday loan comes with very serious risks. Payday loans are unsecured, meaning the lender does not take ownership of your property as collateral. They are also high-interest loans, meaning you are paying thousands of dollars in fees and interest over the course of the loan. If you cannot afford to pay back the loan, it will go into default and the lender may seize your house, car or other assets.
Another risk associated with payday loans is that once you become delinquent, the lender has the right to garnish your wages or place you in collection. If you fall behind on your payments, you may lose your job altogether. Even though most states allow payday lenders to charge exorbitant interest rates, some states have enacted legislation to protect consumers.
Even though payday loans aren’t illegal, they should never be considered as a lifelong solution. Lenders can refuse to offer loans to anyone who appears likely to misuse them. And even if you do qualify for a payday loan, they can still reject you if they determine that you won’t be able to pay off the loan within the allotted timeframe. Most borrowers find themselves facing additional charges after they fail to repay their loans, including late fees and interest charges.
When applying for a payday loan, always read the fine print carefully—including the repayment terms, interest rates and fees. Know what the consequences are before signing the agreement.
How to Avoid Payday Loans
If you are struggling to pay your bills and find yourself falling behind on your loan payments, you may wish to consider alternative options. Here are some tips to help you avoid getting into a payday loan situation:
Consider a second mortgage:
Many banks and credit unions offer home equity lines of credit and home improvement loans. With a HELOC, you can borrow up to 85% of the value of your home, minus its outstanding loan balance. You may be able to use this money to cover your bills instead of a loan from a payday lender.
Apply for unemployment benefits:
Unemployment insurance benefits last up to six months, giving you a financial cushion until your next paycheck arrives.
Selling items such as jewelry, old furniture and electronics can help raise money to pay off your debts. But be sure to sell these items quickly, so you don’t incur unnecessary fees.
Look for work:
Job hunting is difficult, especially when you have a significant amount of debt hanging over your head. To make matters worse, you may not receive the job you applied for due to your low credit score.
Get professional assistance:
A good credit counselor can help you create a budget and develop strategies to improve your finances. They can also assist you in negotiating with creditors and lenders to reduce debts.
No matter what your current financial situation is, you can always turn to our experts for help. We can help you figure out how to manage your debt so you won’t be caught unprepared in the future.