How Does a Payday Loan Work (And When to Take One)
|Published: 18th July 2019 19:23|
Is your payday still a few days off but you have to pay the bills by tomorrow? Banks won’t give you a loan that quickly. Even if they could, you’re still out of luck if your credit score is too low.
Payday loans are a popular option for people with an immediate need for cash. It’s quick and hassle-free, which attracts 12 million Americans each year.
It helps 69% of those 12 million Americans pay for their bills, food, or rent. Around 16% use it for emergencies they couldn’t prepare for.
But how does a payday loan work? Are there any risks?
Learn what it is, how does a payday loan work, and when you need to get it by reading below.
What Are Payday Loans?
A payday loan is a short-term loan you can use to pay off emergency expenses, bills, and such. As the name indicates, you have to pay it on your payday or within a month.
Because of that expectation, a typical loan does not exceed a few hundred dollars. However, some loan terms today can last for 2 months and even 6 months.
How Does a Payday Loan Work?
A payday loan is quick cash; you can apply, sign a contract, and get the amount you’re borrowing in under 24 hours. You can do every step of this process online without having to talk to another human being. They’ll already have a set of lending guidelines that they will use to assess your application within the day.
In some offers, you have a choice to pay it all back in a one-time payment or installments.
You might have to write a check that covers the borrowed amount plus the fee for borrowing. When your due date comes, they’ll encash it, but not all loans require this.
Many lending companies now also use a CPA or Continuous Payment Authority. Using it (with your authorization), they can take money from your bank account on the agreed schedule.
Payday loans also offer rollovers, which rolls over your balance to the next payday. You’ll have to pay the finance charge as agreed, though. Your rolled-over balance will then accrue the same charges.
Benefits of a Payday Loan
Payday loans do have a high-interest rate for a small amount of money, but you’re paying for the convenience and quick resolution of your short-term problem. Here are the reasons why payday loans are a good idea for you:
The quick processing is the main appeal of payday loans; after all, its main use is for emergencies and dues. Once you’ve completed the short application, you may get the funds the same day or the next working day.
Conventional loans have a lengthy process. It's normal for these to involve several pages of forms and a long deliberation period.
No Credit Check
To simplify the process, payday lending companies don’t do a credit check on applicants. As long as they have all the requirements and they pass the assessment, the funds will be ready for transfer.
Great for Self-Employed and Students
The requirements for a payday loan isn’t as extensive as in other short- or long-term loans. This makes it a viable option for the self-employed and college students. If you can’t complete the documents required by other loans, find a reputable lender who can let you borrow money with a fair interest rate.
Other institutions also don’t require employment details and other income documents. Be careful with this option, though, as you might fall for extreme interest rates.
Check out this article to learn more about payday loans for the self-employed.
When to Take a Payday Loan
Payday loans are a great option for when you are in a pinch. However, as with all other loans, you have to pay it back at the agreed date. Else, you will incur high-interest fees and other penalties.
When Your Bills Are Due
If one or more of your bills cannot wait another week or two, getting a payday loan to resolve it is a good idea. It will take care of your bill for that week or month. You won’t have to worry about your getting kicked out of your place or having your electricity cut off.
Once You’ve Considered Other Options
Before getting any loan at all, you might want to consider other options that will work better for your situation. You may be able to ask your parents or friends for some quick cash that you’ll promise to pay in a couple of weeks, for example. Contacting the person or company you owe money to and negotiating might also work in your favor.
When these are not possible, though, applying for a loan remains on the table. But you have to be responsible about it.
When You’ve Reviewed the Risks
Payday loans come with a lot of risks; the interest rates are higher than other short-term loans, the financial charges for rollovers can deal huge damage to your financial life, and you don’t ever want to miss a due date.
Review these risks before taking the plunge and make sure you can handle them. If you’re sure you can pay it back on the agreed date, you won’t have to deal with more issues.
When You’re Sure You Can Pay It Back
This is the most important consideration – only get a payday loan when you are 100% sure you have the means to pay it back.
Always remember that payday loans are a quick and temporary solution. If you can’t pay the loan back, you might suffer from high penalty fees and interest fees.
This puts them in a cycle of borrowing money, where they lose money to interest each payday.
Before getting a loan, make sure your next payday can cover it plus your other essentials until the payday afterwards.
Be Smart in Choosing a Payday Loan
How does a payday loan work? This guide should walk you through the process and the benefits. The next step is learning how to choose a trusted and reliable lender. In summary, payday loans are a great option for emergencies.
Do you need a payday loan? Still looking for more financial advice? Feel free to explore our other guides today to discover more tips and tricks.