A payday loan lets you borrow money for a short-term period and is usually payable on your next payday. However, these are often not for large sums of money and have hefty interest rates.
The typical borrowing limit is $500, though restrictions might be higher or lower. Interest rates can be costly. The usual loan annual percentage rate (APR) is 664 percent which is more than 40 times higher than the average credit card interest rate.
Paying a payday loan is usually done in one lump sum on the borrower’s next payday or when another source of income becomes available. On the other hand, the due date is usually two to four weeks from the loan date.
A payday loan can be a fast way to get out of a financial bind quickly, but it’s essential to understand what you’re entering into so that the loan doesn’t become troublesome in the future. In addition, you must read the payday loan agreement since it provides the exact due date to avoid incurring late fees.
Here are things you should know about payday loans.
They Don’t Consider Your Ability to Pay
Payday loans help financially strained people. However, payday loans do not always care about your ability to repay the debt. Many lenders do not even do a thorough credit check when you apply for a payday loan.
They will approve the loan even if you have a poor financial situation or a low credit rating. But, payday loans do not help you develop credit. In addition, your debts in a collection may hurt your credit if you default on your loan and your obligation is transferred to a debt collector.
Unfortunately, it may lead to people becoming locked in a debt cycle due to a lack of financial capacity to pay. Over 8.9 million American households used payday loans and other financial services, and some of them might be unable to repay such loans.
They Are Easy to Obtain
Payday loan companies are small credit merchants, with many having physical offices. There are also online payday loan applications. Typically, the application only requires a pay stub to demonstrate your short-term planned revenue.
The loan might be authorized in a few minutes as long as you have the basic requirements. Borrowers must be minimum of 18 years old and must provide proof of a bank account, a source of income, and valid identity.
Approval of a payday loan application can take less than 15 minutes. However, the borrower usually needs to write a check for the loan amount plus a lending fee. The lender will keep the check until your due date.
Payday Loans are Regulated
The regulation of payday loans has been a little all over the place the past several years. Each state regulates loans differently, so be careful to verify the legislation in your area. In addition, some loan lenders must describe all of the methods for dealing with missing payments.
Even if your loan provider is not extensively regulated, make sure to ask questions about them to ensure you understand how the money is going to be repaid, especially if you miss a payment. You can send your concerns to the Consumer Financial Protection Bureau (CFPB). It is a U.S. federal body that protects consumers against lenders and other financial companies’ unfair, misleading, or abusive activities.
On July 7, 2020, CFPB released a final rule repealing the Obama administration 2017 rule requiring payday lenders to examine a borrower’s ability to repay a loan before approving a loan. This makes it easier for consumers to apply for and obtain loans.
Although it maintains the regulations that prevent payday lenders from frequently attempting to withdraw funds directly from a lender’s bank account, critics argue that the new policy will put many Americans in a position where they cannot repay their payday loans.
There May Be Additional Fees
Payday loans are fast, but it does not come cheap, and you have to ask how much are the additional fees. Many payday loans will levy additional fees such as late fees and rollover fees.
Make sure you understand the specifics of any costs for late payments. Then, consider a payday loan alternative to avoid high-interest rates or hidden fees. Look for loans that have a quick approval process, allow you to pay back over multiple months, and help you to build your credit.
Look for Trustworthy Lending Services
Make sure to shop around for the best deal before applying for a loan. Consider alternatives such as credit unions, banks, and online lenders. Compare their offers in terms of rates, fees, and other hidden charges.