Payday Loans: What Is It and How It Works

Payday loans are the type of short-term cash advance designed to help you cover urgent cash needs until you get your next paycheck. They are high-cost loans and payments are typically due within two weeks or close to your next payday. They are usually used for small amounts, however, they are one of the most expensive loan options available. It can be hard to repay the loan and it could end up costing you much more than you expected. Here is what you need to know if you are considering getting one.

What is a Payday Loan?

A payday loan is a cash credit intended to cover you until your next paycheck arrives. Once you’re approved, which doesn’t take long, the company will lend you a small amount of money. The average sum you can borrow is around 350, but it goes anywhere between 50 and 1000 dollars. You’ll have to pay back usually within two weeks with a fee that ranges from $10 to $30 for every $100 you borrow. The fees rise if you don’t pay it back on time, and some statistics say that 80% of the loaners don’t. So before you decide to go for a payday loan, double-check if that is the right option for our situation. In 2022 there are loan matching services from companies like Now Loan that help people find the cheapest payday loans for bad credit.

How are the Payday Loan Charges Calculated?

The average payday loan in 2020 was $370 while the average interest or finance charge for a $370 loan would be between $55.25 and $70, depending on the terms you accept. That financial charge is usually between 15% and 20%, depending on the lender, but it could be higher. The amount of interest you will need to pay is calculated by multiplying the amount borrowed by the interest charge, depending on the agreement of course. For example, if you get 350$ loan and agree to a 20% charge rate, the interest charge will be 350*0.20=70$. This means if you borrow 350$ you will be paying back 420$. 

Payday Loans: What Is It and How It Works

What are the Requirements?

Payday loans have quite an easy application process and just a few requirements. You will need a valid ID, a bank account, and a verifiable source of income. After you provide your identification, banking, and other details and get approved, you will receive your loan funds. It usually doesn’t take more than 24 hours. As the experts from explain, the easiest way to get cash is through an automated online application. The money is paid directly into your bank account, and you repay it with agreed interest and charges. Payday lenders also offer the option to rollover your loan if you can’t pay it back on time. However, If you find yourself needing financial support of this kind it is highly advised to plan it very carefully.

The Dangers of Payday Loan

Companies can set up customers to become reliant on them if the loan is due back quickly and the fees just continue to rack up.  Rolling over your loan to the next month might seem like a great solution at the time, and might not feel like a big deal. However, once you start borrowing money, there’s a good chance you can never quit. It becomes difficult to pay off the loan and still meet regular monthly expenses, so you will always be left needing more. While offering a quick relieving fix, these loans do not offer a permanent solution, and you might want to explore other options. Nevertheless, if you decide to get a loan, make sure you understand the rules and conditions of the game as it is surely easy to get lost in it.

Alternatives to Payday Loan

According to the latest research, an average consumer gets payday loans at least once a year, despite warnings from several specialists about the cost of that system. Exploring alternative options to cover your immediate cash needs is always suggested. There are many other ways to find debt relief without resorting to loans. This includes community agencies, private charities, debt settlements, etc. The easiest and fastest solution is surely asking a friend or a family member to help you get through the challenging time. It would also be worth checking to see if you can get a salary advance through your employer, too, as you might get pleasantly surprised. 

If you’re struggling to repay loans, credit cards, and other bills it is good to consult a debt advice service, to help you find the best solution to your situation. Payday loans are in most cases quite a convenient option, so if you decide to get one, make sure to keep in mind the above-mentioned factors, and carefully plan the action.

Written by George K.

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