Life can be unpredictable and financial requirements may knock at your door when you least expect them. Facing such an emergency is tough but there are ways in which you can make your life easier. Opting for payday loans is one such measure that lets you handle a sudden monetary necessity in an efficient way.
Read on to know more about disadvantages of payday loans explained and how they can help you in times of need.
What are Payday Loans?
A payday loan refers to a short-term loan amount borrowed at a relatively high-interest rate. The interest is usually based on the borrower’s credit scores and income amount. However, most payday loans are capped at $500 and the principal is a percentage of the borrower’s subsequent paycheck amount.
Payday loans are an effective way to have the money credited immediately to deal with urgent expenses like rent or other fees. Other names for this kind of loan are check advance or cash advance loans.
Getting Payday Loans
One can avail of a payday loan from either storefront lenders or through one of the many online services. To be approved for a loan, the borrower has to produce proof of income like previous pay stubs during the application process. The lender calculates the principal amount on the basis of the expected income of the borrower. Other things that the lender takes into account before deciding on the borrowed amount are the credit history and current credit score of the applicant.
The lender does not take into account the borrower’s ability to pay back the loan with their other financial obligations. Hence, the onus is on the borrower to take into consideration all such factors. Once approved, the loan amount is made available through a check, cash, an account deposit made electronically, or a prepaid debit card.
Interest Rate of Payday Loans
The interest rates for payday loans are quite high when compared to other types of loans. There are instances where the interest can even reach up to 500% of the APR (Annual Percentage Yield). The state laws stipulate the maximum amount for the loan fees and it can range from 10% to 35% on every $100 loaned. This means that for a loan of %100 with a rate of %15, the APR is almost 400%. This is so much more than credit cards where AP Rs range from 12% to 30%.
Borrowers must be aware of the loan rates and think properly whether they can afford to pay back such rates. They should also be aware of the regulations pertaining to their states (as the rules vary greatly with some states like New York and Pennsylvania have banned them altogether).
Repaying the Loans
The usual practice is to repay the entire loan amount, along with the interest accrued as a single payment. This payment is made on the next day the borrower receives their income from the day of the loan availed. Income can refer to a salary from a job, the payment from other sources like Social Security, pension, etc. Because of this, the due date for loan repayment is typically 14 days to four weeks from the date of loan approval. The lender specifies this date while giving the loan itself.
The loan can be repaid in any of the following manners
- Through a post-dated check to the lender for the full balance and the fees from the interest rate applied.
- Electronically authorizing a debit of the required amount from a bank account, a credit union or a prepaid card.
In case the borrower fails to pay the amount back on time, the lender can cash the post-dated check or electronically debit the authorized amount
There are few other things you should know before applying for a payday loan. Some states allow lenders to offer borrowers the option to renew or roll-over their loans. This basically means that you pay only the fee amount on the due date and the principal due date is extended While this appeals to many borrowers, care must be taken as you might end up paying a lot more than the initial amount of the loan is renewed.
Since the regulations for payday loans vary so greatly from state to state, it is advisable to go to the right payday lender in order to avoid any future hassles. It is also imperative that borrowers are aware of the terms and conditions of their loans so that they are able to pay back the amount on time. If all precautions are taken, payday loans can be a useful way to get some help on a rainy day.