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Payday payday loans are unsecured personal loans that are usually repaid on the next payday. These loans can be tempting as a quick way to get cash, but they can also lead to high-interest rates and hidden fees that can trap you in debt.
Depending on where you live, the interest rate will be between 150 to 650%. Payday loans are very risky and could lead to default. You might be better off looking for alternative funding sources to help you get through financial difficulties.
What are payday loans?
Payday loans, unsecured personal loans, are usually $500 or less and must be repaid by your next payday. Payday loans can be a last-ditch solution for those with poor credit. They have higher interest rates than traditional personal loans and may come with hidden fees. Payday loans are frequently criticized as being predatory, especially for borrowers who have bad credit.
Jeff Zhou, CEO of Fig Tech, says that payday loans can be identified when you borrow money and pay it back in full. This is usually your payday. A majority of payday lenders do not run credit checks. If the lender doesn’t care about your credit history, it could indicate that you are dealing with a payday lender.
Payday loans: How do they work?
You can apply online or in-store for payday loans. Payday loans are regulated at both the state and federal levels. Many states have laws that limit the interest rates and fees payday lenders can charge. Others have outlawed payday loans completely.
A hard credit report may be requested by a payday lender to determine your rate and terms. This is not as common as a payday loan. A lender will usually require proof of income and a payment date.
Payday loans don’t require you to have a good credit rating. The lender can take your paycheck and withdraw the money from your bank account. Payday lenders are able to reduce their risk by doing this. You can also have the principal amount of your loan based on a percentage of your income.
There are several ways to repay a payday loan. The lender might ask for a postdated check, which it will deposit on your next payday. You can also authorize the lender to withdraw funds from your account after you receive benefits like Social Security income or pensions.
Other costs and fees
Payday lenders do not typically charge interest rates similar to traditional ones. Instead, payday lenders calculate the fees you need to borrow and add them to your balance. As an example, let’s say a payday lender charges $10 per $100 borrowed. This means that you would have to pay $50 for a $500 loan and $550 on your next payday.
Lenders might offer a rollover if you are unable to pay the monthly payment on your next payday. However, you will still have to pay the original loan balance and the rollover fee. These fees can quickly add up as payday loan borrowers often roll their balances over to avoid paying the full amount. It is difficult to get out of the payday loan debt cycle.
Personal loans vs. payday loans
There are some similarities between a payday loan and a personal loan. They are both unsecured loans. This means they can’t be backed up by collateral, unlike a loan or car loan. You should be aware of some important differences.
Terms for borrowing
Personal loans usually have terms between one and several years. Payday loans have shorter repayment terms. Payday loans are often repaid within a few weeks. The full payment, including interest and fees, will usually be due by your next payday.
Payday loans are typically for smaller amounts, usually less than $500. Personal loan borrowers often require more cash. The average personal loan balance was $7,104 as of the fourth quarter of 2021.
Personal loans are usually paid monthly online via direct deposit from a bank. A payday loan can be rolled over to the next payday if you don’t have enough funds or your check bounces.
Personal loans come in many forms, but they will generally have lower interest rates than payday loans. The lender you choose, how much you borrow, and your credit score will all affect the interest rate.
Bad credit can get you payday loans
Payday lenders don’t require a credit check. Because payday lenders understand that many borrowers seeking loans for bad credit are unlikely to have good credit, they don’t require a credit check. Lenders compensate for this credit risk by charging higher interest rates, and additional fees.
If your payday lender does not require you to have a hard credit report and you are able to pay the entire amount back by the due date, a payday loan will not negatively impact your credit. You may notice a drop in your credit score if your lender requires a hard credit review.
If your check bounces or you don’t have the funds available on the due date, the amount may be sent to a collection agent. This could negatively impact your credit score.
Steady borrowing costs
Payday loans can cause financial problems and damage credit scores through their high-interest rates. Zhou says that payday loans have a high-interest rate, but the greatest risk is the fine print.
There are many hidden fees such as mandatory subscription fees and early repayment fees. An example of this is the $520 average consumer paying in fees for a $375 two-week payday loan.
There is a risk of default
Zhou says that payday loans pose the greatest danger to your finances. They can become a temporary fix or a drain on your financial resources. Only 14 percent of payday loan borrowers are able to repay the loan.
Rollover fees excessive
If you don’t have a plan for paying your payday loan in full by the due date, you’ll need to roll over your loan. This will result in you being responsible for the principal balance, additional fees, and accrued interest. This vicious cycle could lead to high-interest debt.
Alternatives to payday loans
Although you might not be eligible for a traditional bank loan to cover your immediate cash needs, these options might work better than a payday advance.
The bottom line
If you have the right circumstances, payday loans may be beneficial. If you are able to repay your debts on time and have good financial standing, a payday loan may be an option. Payday loans have risks and could damage your credit rating or land you in jail.
Talk to banks and credit unions about your options before you apply for a payday loan. Payday loans can have many negative aspects that outweigh their benefits. Before you apply, make sure to read the terms.