What are Payday Loans?
A payday loan is a cash advance for amounts usually ranging no more than $1000. These loans come with very high interest rates and short term payment installations. Companies will check and make sure the borrower has a paycheck sufficient enough to repay the loan amount. There are different methods that vary from company to company but often times interest rates get as high as 400% These annualized rates are generally frowned upon and even state legislators are getting involved.
The way a borrower can get a payday loan is surprising easy. Most companies will have a store where you can go in with your pay stub, official ID and a bank check. The lender in the shop will offer an set amount and a greed upon interest rate of say 15 dollars for every 100 borrowed. The lender requires a postdated check to cover any loan fees and tell you the check will be cashed at the end of the loan period. And sometimes they will require electronic withdraw from your bank account.
Payday lenders are subject to the federal Truth in Lending act which requires lenders to disclose the total cost of the loan. Whether they are store front or the newer type, over the internet, are all subject to this.
Advantages of Payday Loans
One huge advantage of this type of loan is how quickly a borrower can access it. It offers a very fast way to get money into your bank account which can be either instantly or less than 24 hours. This makes emergency situations where money is needed quickly easier and faster to solve. Being informed that you’ve been rejected for borrowing is also very quick and allows customers to move on in the event of an emergency.
The mother advantage is how discrete they are. You will need to provide all legitimate information but many company’s now operate online. So no need to walk into a bank and explain your situation. This allows you to keep your finances private and save ones reputation.
Disadvantages of Payday Loans
A major downfall to these kinds of loans are the notoriously high interest rates. If a borrower pays $75 in interest on a $500 loan that means the interest rate is 15%. A 15% interest rate is not horrible over a year. However these loans are over the course of two weeks. If you sit down and annualized it the interest rate is nearly 300%. Often times these loans can get as high as 400%. So assuming no payments were made that $500 loan would be over 2k!
This often leads to a cycle of getting locked into loan payments. Once you cant pay the first loan you’ll need a second and a third for the second and a fourth for the third! This is because the first loan amount based off their paycheck didn’t include unforeseeable expenses.
Lenders do offer a emergency service for those who truly do need it. However it can be a dangerous game to play especially if the funds are used for entertainment and not emergencies. Be careful if you do decide on going to one of these lenders and don’t over borrow. Diffidently budget out the pros and cons first!