IIf you’re ever in a rush and need cash right away but don’t qualify for a personal loan, you might consider taking out a payday loan. A payday loan is a small, short-term loan that you pay off after you receive your next paycheck, usually two to four weeks after you take out the loan. Payday loans tend to have small loan limits, typically up to $ 500, and do not require a credit check.
While they can be easy to obtain for many people, they can be costly and harmful to you long after you have borrowed. Here’s how payday loans work, their impact on your credit, and alternative options.
How a payday loan works
You can take out a payday loan online or in person if it is available in your state. For many payday lenders, no credit check is required. This is appealing to borrowers who don’t have very good credit (or no credit at all) and need cash quickly.
Once you’ve completed an application, you’ll write a post-dated check for the amount you borrow, including fees and interest, ensuring the lender will be paid by your next payday. If you can’t afford to pay off the loan on the due date, some lenders have the option of renewing or rolling over your plan to extend the due date, but this will incur additional fees and interest.
The dangers of payday loan
Payday lenders prey on the most vulnerable groups: those who urgently need funds but don’t have a good credit history to borrow from banks, credit unions and online lenders. Because lenders tout immediate funds in your account and no credit checks, many borrowers who don’t need to borrow a lot of money turn to a payday loan.
But predatory lenders are everywhere, so much so that some states do not allow payday loans. Most states regulate payday loans, including repayment terms, finance charges, and loan amount.
Even with the regulations in place, interest rates can approach 400%. Conversely, personal loan interest rates can reach 36% for borrowers with very low credit scores or limited credit history.
A big danger with payday loans is the repayment period. Conventional personal loans, even for small amounts, allow you to pay off your loan in a few months. Payday loans, on the other hand, require you to repay the loan between 14 and 31 days after taking it out. Many borrowers do not have the funds to repay the loan within this time frame and in some cases end up borrowing more to pay off their loan, along with the additional finance charges.
Who is a payday loan for?
Payday loans are expensive and can cause more harm than good. While this is one way to have the cash in your hands until your next paycheck, the risks usually outweigh the benefits. We do not recommend that you use payday loans. Instead, look for alternative options, including personal loans, credit cards, or even borrowing money from friends or family.
Payday loan costs
The cost of your loan depends on how much you borrow, your interest rate, your lender, and where you live. Here is an example of the costs you can incur when taking out a payday loan.
In Iowa, you can borrow up to $ 500 with a payday loan, and you’ll be charged up to $ 15 for every $ 100 you borrow. If you borrow all of the $ 500, that’s $ 75 more, or $ 575 in total. But your annual percentage rate (APR), which is calculated daily, will be much more than that. For example, in Iowa, you can borrow for up to 31 days. If you borrow for the full term, your real APR will be 176%.
By comparison, personal loans typically cap their APR at 36%. If you use a credit card to make a purchase, you will likely have an APR of less than 30%.
Borrowing Limits For Payday Loans
Borrowing limits usually depend on where you live. Since some states do not allow payday loans, you may not be able to borrow money through one.
Most states cap their borrowing limits at around $ 500, but the limits vary. For example, Delaware limits its borrowing amount to $ 1,000 while California sets a maximum limit of $ 300.
Paying off a payday loan
For many lenders, you set a one-time loan repayment when you borrow money. You will usually pay off your loan with a post-dated check, including the full amount you borrowed as well as fees and interest. However, you can also pay online or by direct debit from your bank account.
Your payment date will be between 14 and 31 days from when you borrow the loan, usually before your next payday. The loan is repaid in a single payment, unlike personal loans, which provide for installments over a specified number of months. Personal lenders look at your income to make sure you can afford what you borrow, making sure the monthly payments are within your budget.
How Payday Loans Can Affect Your Credit
Many payday loan lenders do not perform a credit check, so applying for a payday loan does not affect your credit rating or your report. Even if you borrow the money and pay it back on time and in full, the positive payment doesn’t impact your credit either.
But if you don’t pay off your loan in full, and your payday lender hasn’t electronically withdrawn money from your account, you could be liable for the outstanding balance as well as unpaid finance charges. If you have been in arrears for a long time, the lender might use a collection agency and the overdue note may appear on your credit report.
Alternatives to payday loans
Payday loans are not a good option in almost all circumstances. If you can, explore all of your other options before taking out a payday loan, including:
- Personal loans. While many personal lenders only approve borrowers with at least fair or good credit, there are lenders who cater to borrowers with poor or risky credit scores. Some credit unions have payday loan alternatives, allowing borrowers to take out loans of up to $ 1,000, depending on the institution. Credit unions are not-for-profit and are more likely to work with borrowers who don’t have a lot of credit.
- Credit card. If you already have a credit card, consider using it to make a payment or purchase. APRs are lower than payday loans and since you already have one, you don’t have to benefit from it. Most cards also offer a cash advance, which lets you withdraw money at an ATM, but these transactions come with high APRs and additional fees. However, both options are cheaper than payday loans.
- To borrow money. If you don’t need to borrow a lot, ask friends or relatives to cover you until you can streamline your spending. Many times, borrow money from relatives means you have a little flexibility to pay off your loan, and often interest-free. If you choose this route, agree to terms and conditions that outline how to pay off your loan and what happens if you can’t pay it back.
In addition to these alternatives, take a close look at your financial situation, including your required payments and monthly expenses, to see if you can free up funds. For example, review your budget and see if some not-so-terrible expenses can wait. You may find that you have enough cash to cover your needs until your next payday, which allows you to avoid the possible pitfalls of a payday loan.
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