Each of us at least once heard about payday loans. Some people survive thanks to them, and some openly hate and consider them the greatest evil of the credit world. However, both groups are wrong.
With proper use, such loans can be a convenient problem-solving decision, but you need to assess your own budget to avoid getting into debt traps. However, payday loans have a fixed rate, low requirements, and the ability to provide money for unexpected expenses quickly. Therefore, it is important to know all the nuances of such loans so as to use them positively.
What is Payday Loan
A payday loan is a short-term, unsecured financial product that has a limited loan amount. A payday loan is most often used to cover unexpected expenses, such as medical bills or car repairs. However, borrowers often take payday loans to pay utility bills, rent, and other needs.
The borrower most often has available amounts from $100 to $500. Some payday lenders offer higher amounts, up to $1,000 or $1,500. Payday loan repayment period – 14 days or a month until the next paycheck. Payday loans must be repaid in one payment, paying the entire loan amount plus interest rates and fees. Often, payday lenders electronically withdraw money on your next payday if the borrower has granted access to their account.
In addition, payday loans are distinguished by the fact that a payday lender, unlike a bank or a credit union, focuses on the income of the borrower and not on his credit history. This way, those with bad credit can still access the funds.
The biggest risk of payday loans is interest rates. They may differ depending on the payday lender, but a payday loan cost often ranges from $15 to $30 for every $100 borrowed.
How Payday Loans Work
First of all, to borrow money, you must be over 18 years of age. In addition, you will need to verify your identity and that you are a US citizen. Payday lenders also ask for proof of your income. As mentioned above, it depends on this whether your loan is approved. You can apply both in-store and online.
After applying, payday lenders conduct a soft credit check. This check does not require a credit report from the three major credit bureaus, so it does not affect or lower your credit score. You will be notified in a few minutes if your loan application has been approved.
If approved, you will be required to sign a loan agreement. If you apply for a loan online, an electronic signature is used for this. It is important to read the agreement before signing it, as it contains all the terms of the loan, including fees. According to the law, the payday lender does not have the right to hide any fee or commission from the borrower and is required to indicate this in the contract.
You will have access to the funds a maximum of the next day after signing the loan agreement. After the money is credited to your bank account, the countdown of the loan term will begin. It is very important to repay payday loans on time. Due to the payday loan interest rates, late payments can land you in debt.
What Happens If Don’t Pay Payday Loan
If you understand that you cannot pay back the loan on time, then the first thing you need to do is contact your lender. Some help borrowers get out of the situation; however, this will not be a good offer, and you will most likely lose even more money.
However, not paying payday loan debt at all is a bad idea. The lender can sell the debt to a collection agency. There, in turn, three large credit reporting bureaus will be informed about the non-payment of the loan. This will greatly damage the borrower’s credit rating and will remain in the credit history for seven years.
Borrowers who don’t repay the loan are not sent to prison; however, the collection agency may initiate litigation, resulting in the borrower’s bank account being seized or wages withheld.
Alternatives To Payday Loans
Perhaps the best alternative to a payday loan is a personal loan. They have fairly low-interest rates and a long repayment period, which has a positive effect on the financial situation of the borrower.
In addition, credit cards can also help with unexpected expenses, although their interests are higher than personal loans, especially if you need to withdraw cash.
You can also consider short-term loans such as title loans or pawn loans. You can also consider short-term loans such as title loans or pawn loans. But it is important to remember that given their annual percentage rate, this is a form of predatory lending.