If you’re considering payday loans, it’s best to research them before applying. Payday loans have become so popular, but there is still some misinformation about what they actually are and how they work. Many people tend to think that payday advance is not the same as payday loans. Also, others think that payday lenders can’t report you to credit bureaus if you default, but they actually can, and any negative items will affect your score.
What are payday loans?
Payday loans are usually small dollar amount loans that are given on agreement that they’ll be repaid when the borrower receives their next wage. Typically, payday loan providers do not require credit checks or collateral, making these loans appealing. Plus, payday loans are easy to obtain and usually require only basic information like your name, address, phone number and banking or routing numbers. The amount a borrower can get ranges from $100-$1000, depending on your state regulations.
How do payday loans work?
Depending on your location, you can get payday loans online or via a physical branch with a payday lender. First, you’ll be required to fill out an application form in which you’ll be approved pretty quickly. Upon approval, your payday loan will go directly into your bank account in less than 24 hours.
You’ll then need to repay the loan in full and the finance charge by the due date, which is usually within 14 days or by the time you receive your next wage. The finance charge on your payday loan will depend on your loan amount, but lenders can charge you up to 30% interest on the loan, but some payday advance branches cap their fees at 15%.
Despite the high costs, many households still take out payday loans often. There are a few reasons for payday loan popularity, including:
Money for emergencies- faster loan approval and disbursement make payday loans a great help during an emergency like car repairs, medical bills and other unexpected expenses.
Easy access- payday loans are easy to get and require only basic information.
Bad credit is not much of an issue- You can apply for a payday loan with bad credit as long as you have proof of income and residence.
Unsecured- You can borrow up to $1,500 without having to provide collateral
Debt consolidation- A payday loan will help you pay off any debts that are piling up.
How is a payday loan different from a personal loan?
The main difference between payday loans and personal loans is the basic terms. A payday loan is a short-term loan and is usually due within a month, while a personal loan can have a repayment period of up to two years.
Personal loans have a lower interest rate than a payday loan, which comes in handy, especially when you’re debt consolidating or paying for an emergency. Payday loans are easy to get approved but usually offer $500 or less. However, some personal loan companies can lend as much as $100,000.
Payday loans are easier to access compared to personal loans. After applying, it’ll only take 30 minutes for the loan to be approved and disbursed. On the other hand, a personal loan can take several days to process.
Risks of a payday loan
As mentioned before, payday loans can be quite expensive. Payday loans are very easy to get, but you’ll need to make sure that you can afford the loan and interest rate. The average payday loan borrower ends up spending more than 200% of the original loan amount in fees alone!
In essence, payday lenders often charge $15 for every $100 you borrow, which is much more than the typical interest rates on a credit card or personal loan. However, some payday loan providers even cap their fees at 15%, but that’s still much higher than other types of loans and credit cards. In addition, if you already have a lot of outstanding debt or late payments on your credit report, some payday lenders may also be unwilling to approve you.
Bottom line
Sometimes, you may not have enough money in your bank account to cover unexpected bills like car repairs, medical emergencies, or other unplanned events. But don’t worry! Payday loans are an excellent option for those who need some extra funds ASAP. They offer the convenience of getting money on your terms, and there is no credit requirement or long-term commitment.