A short term loan that is not more than a few weeks is known as a payday loan. These loans can be availed from payday lenders who operate from storefronts or online. It is best for individuals who are in urgent need of cash.
How Do They Work?
Payday loans are so named as they are usually due on the borrowing person’s next payday. It helps people for a short time usually until their payday.
The money that gets sanctioned from this loan is deposited directly into the borrower’s bank account. They repay the loan in full along with interests as well as charges by the end of the month.
Although, a person can also borrow for a longer duration mostly 3 months and then repay the loan in regular installments. In general, a borrower will have time till the payday to repay the loan along with the interest.
But there are some lenders that allow you to select the period of repayment for paying back your payday loan. They are not similar to the regular bank loans in many ways such as:
Small Amounts: In most of the states where payday loans are legally approved, there lies a limit on the amount you can borrow. This limit varies from $300-$1000. The most common borrowed amount is $500.
According to the recent research report, $375 is the average size of a payday loan.
Short Period: A borrower is supposed to pay back a payday loan when he gets his next paycheck, i.e.: on his next payday. In most cases, it means that the period or duration of the payday loan is for 2 weeks. But it can also sometimes cover a month.
No Installment: If you take a regular bank loan, then you get the option of paying it back in different installments. For example, if you take a $1000 loan from a bank for 1 year at an interest rate of 5% then you repay $85.61 every month. So you are paying $2.28 for the rate of interest and the remaining for the principal. But if you borrow a payday loan then you need to repay the entire amount that is the interest along with the principal all together at the same time.
Rate Of Interest: If you get a loan from a bank, then the interest that you pay actually depends on your credit score and also the type of loan you got. If a borrower has a wonderful credit score he has a chance of getting a mortgage loan with 3% or reduced APR or annual percentage rate. But if someone with a bad credit score takes an unsecured personal loan he would have to pay an APR of 25% or even more. In case of payday loans all borrowers are charged the same interest rate. It is usually $15 on every $100 that is borrowed. For example, if you take $500 you will repay $75 in the interest. It is not that bad, but remember that the loan period is for 2 weeks.
Credit Check Not Required: Banks always check a person’s credit score before they give out a loan in order to understand how much they might charge him. If a borrower has a really bad credit score, he will probably not be eligible to avail of a loan. But to get a payday loan, you do not require a good or any credit at all. All you will require is an ID showing that you are aged at least 18 years, proof of your income showing that you are employed, and a bank account. You can get the approved loan in an hour or less and that is the main reason why payday loans are so much appealing to financially needy people.
Auto-Repayment: When an individual gets a payday loan, he hands over one signed check or other documents, that allows the lender to take out money from your bank account.
So if a borrower does not repay the loan as it has been scheduled, the lender will either cash the check or withdraw the required amount from their account.
Simple Renewals: If you are sure that you will not be able to repay your loan on the scheduled time, you can renew it before it becomes due. You need to pay a fee that is equal to the interest that you owe and get another 2 weeks for yourself to repay the loan along with another payment for the interest. In some states where this is not valid, you can take a second loan immediately to cover all that you owe on your first loan. This
When there is an emergency and you have a bad credit score along with no savings, a payday loan will seem to be the best choice.
But if you cannot afford to repay it at the scheduled time it will make your situation worse. So think wisely before selecting one.