Payday loans are short-term financial assistance that can be repaid in one lump sum when you receive your next paycheck. They’re commonly used for emergencies or unexpected expenses.
Payday loans can be beneficial in certain instances, but they also often lead to an endless cycle of debt. That is why many financial experts suggest avoiding them altogether.
What is a payday loan?
A payday loan is a high-cost, short-term, high-interest loan that typically needs to be repaid within two weeks. They usually total $500 or less and can be an unattainable option for those with poor credit histories.
Contrary to personal loans, which require installment payments over an agreed-upon number of months, payday loans have a single repayment date – usually your next paycheck.
They come with high finance charges that will be automatically deducted from your account every two weeks if you don’t pay back the full amount by your due date.
Payday loans can be expensive and unaffordable due to their high fees and interest rates, turning a short-term financial crisis into an ongoing cycle of debt. If you need an immediate fix, look into personal loans or borrowing from family members or friends for financial support.
How do I get a payday loan?
Payday loans are a quick and convenient way to borrow money when needed quickly. Unfortunately, they’re usually costly, leading to serious debt problems if not paid back on schedule.
Personal loans are a more budget-friendly solution. Usually, they have terms of months or years and require a credit check before approval.
Payday lenders typically don’t run a credit check, allowing them to charge exorbitant interest rates. Even if you pay back your loan in full and on time, it could still adversely affect your credit score.
Applying for a payday loan can be done either online or in-person at the lender’s location. Typically, you’ll need to supply your name, address, phone number, email and references along with other necessary documents.
Additionally, you’ll need to write a postdated check for the amount borrowed plus any fees and finance charges. Once this has been cleared by the lender, they’ll cash your check or electronically debit your checking account.
What are the benefits of a payday loan?
If you find yourself facing a temporary cash crunch, payday loans could provide the money needed. However, be mindful that these loans come with high fees so it’s important to understand what those costs entail before applying for one.
Payday loans with terms of more than six months should not be taken out, as they can become a financial bind and lead to high interest rates. Furthermore, they could negatively affect your credit score.
They often target those with poor borrowing history and little to no savings, especially those in communities of color where payday lenders are more prevalent than in white neighborhoods.
What are the disadvantages of a payday loan?
Payday loans can be a quick and effortless way to borrow cash when you’re short on funds. However, they come with some risks, so it’s important to use them responsibly.
The primary drawback to payday loans is their cost-effective nature; on average, loans cost $15 per $100 borrowed with fees increasing each time the loan matures.
Another issue with payday loans is that they can negatively impact your credit score, potentially creating serious difficulties when applying for future credit.
Fortunately, there are other alternatives for payday-style borrowing which are safer and don’t carry such high interest rates. These include credit-card cash advances and some small loan companies.