Payday loans are a quick and easy way to get hold of money in a pinch; however, they can be incredibly expensive. Interest rates often range from 150-650 percent, meaning that the amount you repay can be vastly higher than the amount you borrowed.
This can leave you stuck in debt, as it is often difficult to pay back the loan by your next payday without taking out another loan. Furthermore, these loans can have hidden fees and charges that make them even more costly when all added together.
Defaulting on a payday loan can have serious financial repercussions, so it’s important to consider other funding options before resorting to a payday loan.
So, What are Payday Advance Loans?
Payday loans, also known as cash advances, are short-term, high-interest, unsecured personal loans. Typically, borrowers need to repay the entire loan amount on their next payday or within two weeks. These loans usually range up to $500 in value but can be higher depending on the lender.
They present a last ditch option for people with poor credit and come with sky-high interest rates and hidden fees that make them expensive and potentially predatory. Payday lenders do not run credit checks, so if a lender is not interested in your credit history, it’s likely they are a payday lender.
Borrowers should investigate all possible options before seeking a payday loan, as these products carry a steep financial burden that can easily become unmanageable.
Downsides of Payday Advance Loans
As you could have guessed, there are countless downsides of payday advance loans. These include the following:
- High borrowing costs: On average, you can be asked to pay $520 in fees on a two-week payday loan for just $375. These fees can include change fees, mandatory subscription charges, or early repayment fees. This means that if you’re not able to repay your loan quickly, you could end up paying more in fees than you borrowed in the first place.
- Default risks: While they may serve as an effective and fast way to get cash in a pinch, they can quickly become a long-term drain on personal finances if not paid back in time. Many lenders take advantage of vulnerable individuals by extending their loans without informing them of the terms or expected payment date – creating a cycle of debt that continues even after borrowers think it is resolved.
- Rollover fees: When you don’t have a plan to pay off the loan on the requested date, you become responsible for both the balance of the principal amount plus additional fees and interest for the loan. This extra money adds up quickly; before you know it, your debt is much higher than originally intended.
How Do You Get a Payday Advance Loan?
These types of loans can be obtained at an in-person lender or through an online application, and the fees and interest rates associated with them are typically regulated at both the federal and state level. While some states have enacted restrictions on the amount lenders can charge for payday loans, others have completely banned them within their borders.
Typically, these types of loans come with high interest rates and fees that can make repaying them difficult. Anyone considering taking out a payday loan must be aware of these risks before doing so.
First, A Credit Check
When applying for a payday loan, the lender may request a hard credit check to view your credit score as part of their assessment process. However, as payday loans are designed as short-term financial solutions, the impact of your credit score is usually not taken into account when approving you for a loan.
Instead, lenders often require proof of income and pay date in order to verify that you will have enough money available to repay the loan when it comes due. Additionally, depending on the terms of the loan and your expected income, lenders may decide to lend you a principal amount based on a percentage of your predicted salary.
This effectively minimizes their risk by giving them assurance that they will be repaid when you receive your next paycheck.
What Are Your Repayment Options?
A payday loan can be repaid using a few methods. One way is to provide the lender with a postdated check that can be cashed on your next payday, allowing the lender to collect the full repayment amount plus any additional fees or interest.
Alternatively, you could authorize the lender to withdraw the funds from your bank account once your wages are paid by your employer or you’ve received benefits such as Social Security income or a pension. In either case, it is important to ensure that you have enough money in your account on the repayment date to cover the total amount due for the successful repayment of the loan and the avoidance of potential late payment penalties.
Fees Associated With Payday Advance Loans
Payday loans can be incredibly costly for borrowers. For example, a $500 cash loan with a fee of $10 per $100 borrowed would require a payment of $550 on the borrower’s next payday. If they cannot afford to make the full payment, some lenders may offer a “roll over” option, which allows the borrower to pay just the initial borrowing fee and roll over their balance until their next paycheck.
However, this option can also be costly as it means that they will now owe the original loan balance plus an additional fee for the rollover amount.
Unfortunately, many payday borrowers find themselves in this cycle of constantly rolling over their loan balances due to their inability to pay off their initial loans, leading to fees stacking up quickly and making the repayment process even more difficult for them.
Payday vs. Personal Loans – What Are the Differences?
Personal loans are often a desirable option for those looking to finance larger investments or major purchases, as the loan terms can range from one year to several years. By contrast, payday loans are typically associated with much shorter repayment terms – most of the time, the full repayment amount will be due in a matter of weeks.
This is because these loans are intended to cover individuals’ short-term financial needs until their next paycheck arrives. These loans come with various fees and interest rates attached, which can lead to an expensive endeavor if not managed correctly.
It is important for borrowers to fully understand the terms and conditions of their loan before signing any documents in order to avoid potential financial hardship.
Cash Amounts Each Can Offer
A personal loan is a great option for those needing more substantial financing than a payday loan can provide. On average, personal loans are issued for amounts of money that are $7,104 or more. This makes them ideal for larger expenses such as a home renovation, consolidating debts, or paying medical bills.
Personal loans can be a great way for people to cover unexpected expenses or finance larger purchases. They usually have lower interest rates than other types of credit, and the monthly payments are typically made online via direct deposit from a bank account.
However, with payday loans, if you fail to pay the loan in full on its due date, or your check bounces, you may find yourself in a difficult situation where you need to roll over the loan to the next payday. This will result in more fees being added to your balance, making it even harder to pay off the loan.
Suppose you’re considering taking out payday loans as a short-term solution for financing urgent needs. In that case, you must understand how they work and take into account their inherent risks so that you don’t find yourself in an even worse financial situation down the line.
This is one of the most important differences between these two loans; interest rates!
Personal loans are a great way to get additional money if you’re in need, but their interest rates can vary depending on the lender and your credit score. For example, borrowers with excellent credit will have access to loans with much lower interest rates than those with bad or no credit.
Generally speaking, the amount of money you borrow will also affect the rate you get; typically, higher loan amounts lead to higher interest rates. When compared to payday loans, personal loans almost always have much lower interest rates and more flexible repayment terms.
Depending on your situation and financial goals, a personal loan could be an excellent way to pay for sudden expenses or consolidate debt without taking out a predatory loan that puts you in further financial distress.
Find your state
Find your state and we’ll help you understand the ins and outs of payday loans in your local area.
Payday Loans FAQ’s
What Happens if I Can’t Repay My Payday Loan When Due?
If you foresee difficulty in repaying your loan on time, it’s important to inform your lender immediately. Late repayments can lead to additional fees, increased interest, and a negative impact on your credit score. However, by openly discussing your situation with your lender, they might be able to extend your repayment period or waive added fees, thus minimizing potential consequences. Honesty and open communication are key in such situations.
What’s the Average Cost of an Online Payday Loan?
The cost of an online payday loan can vary widely, from 36% APR to as much as 5,000% APR. This depends on several factors such as your credit score, income, affordability, and the state regulations where you reside. Some states have strict caps on loan charges while others permit higher rates.
How Much Can I Borrow with a Payday Loan?
The amount you can obtain from a payday loan varies considerably and primarily depends on several key factors including your income level, employment status, credit history, and overall affordability. The amounts typically range from smaller loans of $300 to larger ones of $2,000 or more.
How Can I Make Loan Repayments?
Loan repayments are automatically collected through a system called ACH authorization, which debits your account on your scheduled repayment date. You won’t have to make a manual repayment or call us; you just need to ensure there’s enough money in your account on the agreed collection date. If you prefer, you can also manually repay your loan or pay it off early by logging into your lender’s website or contacting them by phone.
Can I Renew My Payday Loan?
Yes, it’s possible to renew your payday loan once you’ve repaid your existing loan in full. Your lender will conduct a series of checks to decide whether a payday loan is still suitable for you and how much you’re eligible to borrow. This can result in an offer for a lower, similar, or higher amount depending on your lender’s assessment and your established relationship with them.