Have you just looked at your bank account and realized you do not have enough money to pay a critical bill? Have you considered a payday loan? These types of loans have become quite popular as a quick way of getting money into your bank account when you need it most. However, before you decide to take out a payday loan, it is important you understand the pros and cons.
What is a Payday Loan?
Although there's really no true definition of a payday loan, it is basically a high-cost, short-term loan typically for $500 or less. You typically have to pay it back on your next paycheck day. There's a variety of payday loans including:
- Check advance loans
- Payday loans
- Post-dated check loans
- Deferred deposit loans
- Cash advance loans
Whether you apply for a loan online or walk into a payday lender's store, you will need to follow several steps.
- Provide your financial and personal information.
- Tell the lender how much you want to borrow.
- Secure your loan by bank account debit information or check.
- Pay a required fee for borrowing the money.
- Have your cash in hand before you leave the lender's office or have it directly deposited into your bank account.
Again, before going through these steps, it is important you weigh out the advantages and disadvantages of taking out a payday loan.
Advantages
Some advantages of payday loans include:
Loans are Small
Payday loans are typically small amounts. Depending on your state, there might be a set limit on how much you can borrow; however, the standard number is usually up to $500.
Repayment is Only One Payment
You pay your loan with one payment that comes right out of your next paycheck, social security check, or pension benefit. The due date for your loan is usually 2 to 4 weeks from the date you borrowed the money. Your lender will write up your due date in your payday loan agreement.
No Credit Check
With conventional loans, your credit will determine how much or even if you can borrow. However, lenders of payday loans do not even look at your credit.
Various Forms of Getting Your Loan
There are multiple ways to obtain your payday funds. You can receive your money by check or cash, loaded to a prepaid debit card or deposited into your account electronically.
Disadvantages
Of course, there are some disadvantages of payday loans that you have to consider.
Cost of a Payday Loan
Typically, the fees to take out a payday loan are anywhere from $10 to $30 for each $100 you borrow. That can be a hefty charge depending on how much you borrow. If you take out a two-week loan that has a $15 per $100 fee, that equates to an almost 400 percent annual percentage rate (APR).
You Need to Pay Back Loans ASAP
If you do not pay back your payday loan as per your agreement, it can get you into financial trouble. The longer you keep the loan, the more expensive the fees are that you will have to pay. If you fail to pay back a payday loan for a long time, it can result in much larger financial problems.
Could Affect Your Chances of Future Loans
Payday loans could have an impact on your chances of taking out a mortgage or future loans. Even if you pay your loan in full and on time, just the fact that you had to take out a loan tells prospective lenders that your finances were not perfect or in order. Also, lenders will see you taking out multiple payday loans over a few months as a red flag. Lenders do not like to see many payday loans on your credit, even if they are all in good standing. Some lenders even state that they will not lend out money to borrowers who have taken out a payday loan.
Things to Look Out For
Below are some of the things you need to look out for with payday loans.
Interest Rates
Since the loans are just a short-term cash advance, the interest rates on a payday loan are some of the highest rates in the industry. Before you apply for a loan, be sure you read your agreement thoroughly, and fully understand what the interest rates are.
Fees for Late Payment
If you are unable to pay your loan back on time, you will incur some fairly hefty fees for not meeting your agreement. These costs will vary between lenders, so be sure you read the terms and conditions before you agree to the loan.
Meeting their Criteria
When you apply for a payday loan, there will be a set of criteria you must meet. For instance, many payday lenders will not do business with you unless you are at least 18 years old. Also, lenders will not even consider you if you cannot show proof of income from your job or another form of regular income.
Trustworthy
While most payday loan companies are trustworthy, it is always a good idea to check up on the company's reputation as there could be scam companies out there to take advantage of people.
Take a step back and consider your options before you apply for a payday loan. Do you need the cash for an emergency or are you trying to fund an unnecessary expense? Payday loans can be helpful for getting yourself out of a financial crisis. However, if you are only looking to pay for a vacation you have not saved for or cannot afford, it is going to cost you in fees and might even cost you more than it would to simply wait and save.