Introduction
Payday loans are one of the most well-known types of a short-term loan for people who have to borrow money before the next payday. They are usually marketed as a way to get quick cash to pay for some urgent need or another and are in fact, fairly expensive forms of credit. Payday loans are useful in emergency situations, but it’s important to know how they operate to prevent getting trapped. In this article, we will explain what payday loans are, how they work and the advantages and disadvantages of taking one if you are thinking of taking one.
What Is a Payday Loan?
A payday loan is a type of a small, short-term and expensive financial service aimed at helping borrowers to meet their urgent needs before their next salary is due. These loans are normally given in small quantities, and are usually between $100 and $1,500 depending on the company. Payday loans are due on the borrower’s following payday and the amount borrowed, plus interest and fees, is due on that day.
Payday loans are usually quickly approved with little or no credit check carried out by the lenders. This makes them suitable for people with a low credit rating or people who need money badly. However, the convenience of the loans is that they are expensive in the sense that payday loans are much more expensive than conventional loans.
How Payday Loans Work
Getting a payday loan is not very complicated. Here’s how it typically works:
- Application Process:
Customers seek payday loans through the internet or by visiting a payday lending outlet. The application normally calls for identification, proof of income, and a checking account.
- Approval and Loan Amount:
On approval of the loan amount, the lender disburses the loan amount depending on the borrower’s income. Payday loans are usually limited to some portion of the borrower’s wages to allow for repayment of the loan.
- Loan Agreement:
The borrower signs an agreement detailing the loan amount, interest rate, fees, and repayment date. Payday loans often have an annual percentage rate (APR) ranging from 300% to 400%, making them one of the most expensive borrowing options.
- Repayment:
The loan is typically due on the borrower’s next payday, usually within two to four weeks. Repayment can be made via a post-dated check, automatic withdrawal from a bank account, or by paying cash directly to the lender.
- Extensions and Rollovers:
If a borrower cannot repay the loan on time, some lenders offer extensions or rollovers. This option allows the borrower to pay an additional fee to extend the repayment period, which increases the overall cost of the loan due to accumulating interest.
Advantages of Payday Loans
For some borrowers, payday loans provide essential benefits in times of financial need:
Fast Access to Cash:
Payday loans provide an instant answer to emergent monetary needs, as approval is given in several hours.
Easy Qualification:
These loans are available to those who have bad credit ratings or those who cannot meet the standard credit requirements. There is usually little paperwork and credit checks needed.
Short-Term Commitment:
Borrowers are only required to agree to repay the loan within a short time, often between two to four weeks thereby eliminating long-term debt worries.
Disadvantages of Payday Loans
Despite their benefits, payday loans come with significant risks:
High Interest Rates:
The APR on payday loans is significantly higher compared to other types of credit, which means that the amount of repayment can be very huge. For instance, taking a $500 loan means repaying $600 or even more due to the fees and interest charges.
Debt Cycle Risk:
The borrowers who are unable to make the payment on the due date can roll over the amount which leads to more charges and more debt. This can lead to a situation where it becomes almost impossible to get out of the high-cost loan.
Limited Borrowing Amount:
Payday loans are usually limited to a small sum which might not be sufficient to cater for large financial crises.
Bottom Line
Payday loans are fast and easy to obtain, but they are very dangerous because of the high interest rates and fees. Payday loans are a type of credit that should be understood before applying for one and where possible other options should be sought. Borrowers should avoid getting into the habit of borrowing these loans and should only take the payday loans when they have no other option. If you need a cash boost right now, Larvin Advance Loans provides tools and information to assist you in making the right decision for your situation. It is always wise to consider the advantages and disadvantages of using a payday loan before going for it.