Payday loans fall under the unsecured loan category because they don’t need collateral.
Payday loans can also be considered predatory, especially for people with poor credit, as they don’t factor in the borrower’s repaying ability, have high-interest rates, and hidden provisions charging borrowers extra fees. This may result in a debt trap for users.
Payday lending institutions don’t run credit checks because credit score isn’t a determinant for payday loans. Lenders reduce their risk by taking payments from your account as soon as you get your next paycheck.
With all that in mind, here is what you need to know about payday loans:
How payday loans work
Payday loan lenders usually need you to provide proof of income to lend you a portion of what you’ll be paid. You must repay the loan within a short period – generally 30 days or less. Since payday lenders don’t check your ability to repay the loan, they take on a high risk, which is why they charge high-interest rates. They might also charge higher fees for missing repayments.
Payday loan basic requirements
Most payday loan lenders require you to be at least 18 years old and present proof of income. They should possess an active checking account and valid identification to qualify for a loan. Some lenders may ask you to fill out a form enabling the lender to withdraw the loan’s total amount from your bank account, like interest rate and other fees, on the due date. Others may need a postdated check covering the total loan amount and fees to cash on the due date.
Payday loan costs
Payday loans have much higher interest rates compared to other loans. The interest rates may rise or decline based on the lender’s risk exposure, the loan’s operational expenses, and the collection process. Payday loans normally charge a portion per $100 borrowed, which may range between $10 to $30 based on your state laws, and the highest amount the state allows you to borrow.
If you can’t repay the loan on its due date and your payday state regulations permit rollovers, the lender might let you pay only the fees due and then extend the loan’s due date. You’ll then be charged extra fees while still owing the original balance. While some state laws need lenders to provide longer repayment plans for those experiencing difficulties, they differ by state and might or might not allow a fee for choosing a repayment plan.
Payday loan risks
While ideal for quick cash, payday loans are risky too. Their high fees and high-interest rates imply that payday loans can derail your credit score and financial health. Payday loan costs may include mandatory subscription charges, early repayment fees, or change fees which may add up fast. Defaulting a payday loan may convert it into a long-term loan, requiring high rollover fees. This may create a vicious debt cycle that’s hard to escape from. You can evade payday loan risks by:
- Using them as a temporary solution
- Borrowing only what you require
- Not taking several payday loans due in the same period
- Carefully reviewing the loan agreement
- Paying your loan on time
The bottom line is that while they are ideal for emergencies, payday loans can be risky. So it’s important to familiarize yourself with what you need to know about a payday loan before applying.
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