Getting a loan can be a lengthy process most of the time. Loan applicants in need of quick cash may find that regular loans are not their best option.
Moreover, some loans like mortgage loans or loans for businesses may not lend money if the applicant does not intend to use the funds for his or her house or business respectively.
Moreover, the loan applicant may find it hard to qualify for a personal loan due to a bad credit score. For these reasons, some loan agencies have created payday loans.
These loans can help applicants obtain the money they need in a very fast way. But there are some downsides to these loans. To learn more if a payday loan is right for you, read the sections below.
Understanding Payday Loans
Loans classified ass payday loans offer its applicants low amounts of money for high-interest rates. However, payday loans have short repayment periods. Applicants often apply for funds and pay them back once they receive their next paycheck.
That is why these loans are known as “payday” loans. Due to the loan’s short repayment period, applicants must pay interest rates that apply for every day that passes until the applicant pays the loan back to the lender.
Depending on the lending agency, payday loans have many different names. These loans are also known as cash advances, deferred deposits, credit access and more. Applicants should keep in mind that they are the same things, so the same terms or conditions may apply regardless of the name of the loan.
Besides the high-interest rates, applicants may have to pay a service fee to obtain funds from a payday loan. The lender calculates the service fee based on how much the applicant borrows.
Are Payday Loans Harmful?
Avoiding predatory lenders and protecting financial stability are some of the reasons why some individuals may avoid payday loans. Oher reasons why applicants hesitate to borrow funds from payday lenders include:
- State Regulations Payday loans are illegal in many states. Some states have set a maximum interest rate that lenders can charge to regulate payday loans. However, some lenders avoid these regulations. Applicants should always apply for loans at legitimate establishments and check for other regulations in their state of residence.
- Credit score: Payday loan lenders have heavy regulations and extra fees for applicants that fail to pay back for the funds. Loan recipients may be subject to fees, and their credit may be affected. The lending may also place a lawsuit against applicants that fail to pay the funds by the agreed term.
- High-interest rates: Interest rates for payday loans tend to be extremely high. This type of loans has higher APRs than any other type of loan. In states where pay day loans are not regulated, interest rates can go from 400 percent of the amount that an applicant borrows and as high as 5000 percent of the amount of the loan.
In addition to the consequences mentioned above, payday loans tend to be habit-forming. Many payday loan applicants reapply for loans once they have finished paying off their initial loan. The amount that applicants pay for interest and service fees adds up very quickly and may hurt an applicant’s financial stability. Therefore, loan users end up paying a lot more than what they needed in the first place.
How to Apply for a Payday Loan
Applicants should consider applying to a payday loan in case they have a financial emergency. However, they should try to obtain funds in other ways and chose to apply for a payday loan as their last resort. If they choose that a payday loan is the best way for their situation, applicants should learn how to obtain the funds without having to deal with larger amounts of debt later on. If the loan is legal on the applicants’ state of residence, they must meet the following requirements:
- Have an active bank account
- Applicants must be 18 years of age or older
- Have an ID card from the state they are applying in
- Provide proof of income
- Inform the date when they will pay back the funds
Some lenders may also do some research to verify that the information the applicant provides is accurate. The lending agent may verify the applicant’s ability to pay back for the loan and if he or she has any other outstanding payday loan.
Once an applicant provides the lending agent, he or she must pay the early fees. Applicants may be able to access their loan as early as the day that they apply, and will also receive information about how to pay back for the funds.
Note: Active-duty military members are protected by federal regulations and can access payday loans pay no more than 36 percent APR.
Learn About Alternatives to Payday Loans
Applicants may be able to access cash in many other ways. It may be convenient for them to ask a friend or relative for money that they need for an emergency. Other viable options include asking for a paycheck advance from their employer. Moreover, applicants should ask their local bank or credit union to see if they offer a certain loan that may have lower and better interest rates than payday loans.
Instead of applying for a payday loan, candidates may also use one of their credit cards. However, they should only do so if they have enough credit available to spend to avoid overspending charges. Debtors should also negotiate with their creditor to see if there are any payment plans available to repay the debt. Creditors can also grant applicants extra time to settle the amount that they owe.
Applicants may find it difficult to consider or access other alternatives. They may also be denied their requests if they have a poor credit history. However, they should consider other options before applying for a payday loan. Even if an applicant borrows this type of funds, they must be aware of the terms and avoid taking another payday loan in the future.