Here Are 4 Things You need to know about payday loan
Payday loans may seem like a lifesaver when you have an urgent need for cash, but they can also lead to debt due to the high fees and short repayment terms.
Although there is no standard definition for payday loans, they are typically short-term loans for $500 or less that you pay on your next payday.
Although payday loans are advertised as a method to bridge the gap between paychecks or aid with an unforeseen need, the Consumer Financial Protection Bureau warns that they may become “debt traps.”
Here’s the reason: Borrowers often can’t afford to repay the loan or pay the fees. They end up paying more fees by “rolling over” the debt, refinancing it, and ultimately paying more fees than they borrowed.
Payday loans: How do they work?
Payday loans may go by different names — cash advance loans, deferred deposit loans, check advance loans, or online payday loans — but they typically work in the same way. You may get them even without good credit scores because there are payday loans without a credit check.
To acquire a payday loan, you may need to give the lender a postdated check for the whole amount plus any costs. You can also authorize the lender electronically to debit your checking account. The lender will usually then give you cash.
Your following paycheck is when the loan is due. It normally takes two to four weeks for this to happen. If you fail to return the loan and financing costs by the due date, the lender may cash your check or electronically debit your bank account.
Many states that allow this type of lending have a limit on the number of loans and associated fees. Companies may charge $10-30 per $100 borrowed, depending on where they are located.
Which state regulations govern payday loans?
Payday loans are not allowed in all states.
Your state may allow you to get other types of personal loans, even though there is no standard definition of what constitutes payday loans. This chart will help you understand the restrictions that apply to what is considered “payday loans” in your area.
Keep in mind that APR does not always refer to the interest rate. A 14-day loan with 10% interest would translate to 260.71% APR.
Payday loans are a great way to get emergency cash. But there are risks. It is important to know are payday loans bad for your credit.
1.) High annual percentage rates
Imagine that you receive a $500 loan for two weeks. The fees are $15 per $100 borrowed. According to the CFPB, this works out to an annual percentage rate of nearly 400%.
2.) Short term
Payday loans are typically repayable within two to four weeks after the original loan is approved. You should check the regulations of your state, as policies can vary.
3.) Additional fees
Additional fees may be charged if you are unable to repay the loan at the agreed time. These fees can add up if the debt is rolled over or re-borrow. According to the CFPB, nearly 25% of payday loans are re-borrowed nine or more times.
Additional fees may include:
- Charges for insufficient funds lenders will attempt to cash your check electronically or cash it if there isn’t enough money in your bank account.
- Late fees and return-payment fees if you fail to repay your loan on time, contact the lender
- Rollover fees and additional fees may be charged to extend your loan’s term.
4.) Will not build credit
People with poor credit may not be eligible for loans with better terms. Payday lenders don’t usually report your payment history to credit bureaus. This means that the loan won’t help build credit.
Alternatives to payday loans
Payday loans can be a quick fix, but there are other options available that will help you avoid falling into debt. These are some options.
Alternative loans for payday lenders
You may be eligible for lower-interest personal loans if you are a member of a credit cooperative or can join one. Federal credit unions may also offer members payday alternative loans for amounts between $200 and $1,000. These loans typically have terms of up to six months and a $20 application fee. APRs are no higher than 28%.
Your employer may be able to advance your paycheck without any fees in some states. This decision is up to the company. Ask your supervisor or someone from human resources about your options.
Mobile apps such as Earnin or Dave can also be used and will allow you to advance money between your paychecks if certain conditions are met.
Settlement of debt
A debt settlement may affect your credit but could help you resolve your debt and make a fresh start.
Personal loans may come with high-interest rates as well, but if you need a loan and don’t qualify for lower rates, it’s important to do some comparison shopping. Although you may be eligible for a lower rate and shorter terms than the payday lender in-store, you will not know until you shop.
Look for a lender that reports to major credit bureaus when you are looking for a loan. You can build credit by showing a good track record of paying on time for your loans. This will help you qualify for better rates.
You can also work long-term to fix the financial issues that are causing you to be turned down at payday loan counters. Try credit counseling, which could help you develop a budget, and work on starting a savings account.
Payday loans can be a bad option if you need cash fast.
It’s a good idea to shop around and compare loan options and consider long-term changes you can make to your finances that might make a difference. To start, you can try creating a budget and making a plan for paying off debt.
Listen to an expert
Q: Which advice would you give to someone with bad credit who needs a loan?
A: They will need to give proof of income sources and assets that could be used as collateral. No credit can be substituted for home title or car title
Q: What are the best alternatives for people who need emergency loans?
A: Sometimes, relatives can also help. Although payday loans can be acceptable, the interest rates they charge are quite high. These loans should not be taken lightly and must be repaid as soon as possible.
hurt your credit scores
online installment loans with instant approval
types of loans
impact your credit scores
repay a payday loan
credit reporting agencies