Very few of us make it through life in total financial stability the whole time, and sometimes we end up needing to take out a loan. However, there are many loans to choose from, and many different types of loans.
You could get a personal loan, or if you have specific needs a home equity loan, or an auto loan, maybe a student loan. However, if you are in a hurry for some emergency cash to tie you over, and you do not need a very large sum of money, a payday loan is also an option, although not widely recommended.
What Are Payday Loans?
What is a payday loan? A payday loan is a type of loan that you can borrow at a high-interest rate from lenders. However, these are not advised. They are short-term loans, with a very high-interest rate. So they can easily send you into a cycle of debt if you are not careful.
These loans will often only tie you over from one payday to the next, and so you will have to pay them back as soon as the month is up. The rates they charge are high as well, so you will usually find that you end up paying back a much larger sum than what you borrowed.
These can also be referred to as cash advance loans.
The Key To Understanding Them
Payday loans are high-interest loans that do not require any collateral coverage. This makes them a form of unsecured loan.
In some ways, these loans can also be considered predatory, as the interest rates they charge are so high and with little to no consideration of the lenders’ ability to pay back the loan. This can create a cycle of debt just from needing a couple of hundred dollars to get from one payday to the next.
They have hidden fees and charges as well, sometimes, although not all the time, and therefore if you do consider a payday loan it is better to consider an emergency personal loan which will be less likely to trap you in debt.
Granted, not every payday loan will be as bad as this, but it is important to know what you are getting into with these loans. Payday loans have got a bad name for themselves, and while there are some which are less than helpful, there are others that are better.
Always consider other options first before you take out a payday loan, but if you do need to take one of these loans out, make sure that you do plenty of research beforehand.
How Do These Loans Work?
These loans are exactly what they say, they are designed to help keep you afloat until your next payday. The money you borrow with this loan will be paid straight into your bank account, and then you will need to repay them in full, with interest and other charges on top by the end of that month, or the date agreed to.
You can borrow for longer periods, as well, but these loans are defined by their high-interest rates and short-term borrowing periods.
They are very expensive. Also, these loans do not check credit scores either, so just because your credit score is great doesn’t mean you will get a significantly better interest rate. These loans will usually range from $100 to $1,000, and they will usually last for a term of two weeks, although they can be more.
They will often be at an interest rate of 400%, and it can cost anything from $15 to $100. Your interest rate could be anything from 390% to 780% for a simple two-week loan.
The shorter the term is, the higher the APR rate will be. It also depends on which state you live in too. Some states will have laws that cap the cost at a maximum, if your state does not, realistically the lender could add an APR as high as they want to.
All you need to get this type of loan is a bank account, an income, and an ID. They do not do credit checks or ask questions to see if you can afford this loan. If you need money fast you can definitely look at a confidential payday loan, but we still recommend considering alternatives first.
How Long Do These Loans Stay With Credit Bureaus?
These loans have the potential to throw you into a debt cycle, hence why they are not recommended. So, if you do end up in debt because of them, and default on a payment you would expect this to tarnish your credit report for 7 years.
However, payday lenders usually do not report to credit bureaus, even if you are overdue, however, if they sell the debts to a debt collector, then your loan may be filed, and it will then affect your credit score.
This can take up to 110 points off your score. These loans grant you fast access to immediate cash, but since their interest rates are so high, is it really worth it?
The post What Are Payday Loans and How Do They Work? appeared first on InsightsSuccess.