You may need some extra money for an emergency situation, and you don’t have a good credit score. At that time, payday loans can allow you to borrow money even without collateral.
However, you may have to pay a higher interest rate than other consumer loans. But many people still prefer this option because of instant credit. Learn more about payday loans and how you can apply for them.
Payday Loans Definition
It’s typically a short-term loan that charges high-interest rates and doesn’t require collateral. Since the interest is high, lenders don’t consider the borrower’s ability to repay. Apart from high-interest rates, the lenders also have hidden provisions for other charges and fees.
As a result, these loans can lead to a debt-cycle and create traps for the borrower. Hence, financial advisors warn their clients to take a payday loan. However, sometimes people don’t have any option, so they choose this option. Although several attempts have been made to regulate the high-interest rates, they are still extremely high.
How To Obtain Payday Loans?
Usually, payday lenders provide instant cash in a physical store. Some lenders also have online services through which you can enter your details to avail loan. Unlike other consumer loans, you don’t have to worry much about credit score or repayment history. Here are some important factors you need to consider while applying for a payday loan:
- You need to provide pay stubs from your current employer to show your level of income.
- The lender estimates the loan principal based on some percentage of your short-term income.
- Most payday lenders don’t consider your credit history and score to provide you a loan.
Interest Rates Of Payday Loans
You may be surprised to know that payday loans interest rate can be as high as 780% in annual percentage rate. The average interest rate is around 400%. On the other hand, other consumer loans can range from 5% to 30%. So, you need to be aware of the high risk involved in payday loans.
Every state has different regulations for these types of loans. So, you need to know about the regulations of your state before you apply for them. Even if the federal government mandates lenders to disclose their charges, some lenders still hide them. Payday lenders offer loans to borrowers for fulfilling their short-term financial goals.
Pros And Cons Of Payday Loans
Before you take a payday loan, you should weigh its pros and cons.
- Easy Access: One of the best things about a payday loan is you can easily access it within a single day. Moreover, you don’t need to worry about your eligibility for this type of loan.
- Fewer Requirements: Unlike conventional consumer loans, you don’t need a credit score or repayment history for getting a payday loan. The payday lenders only consider your debt to income ratio before allowing you to qualify for a loan.
- No requirement of a Good Credit Score: Typically, you need to have a credit score over 600 or more than 700 to avail yourself of personal loans. However, you can get a loan even without having a credit score.
- It’s an Unsecured Loan: Payday loans are unsecured, so you don’t have to keep anything as collateral to avail of the loan.
- Extremely High-Interest Rate: Although you get easy access to a payday loan, the lender will charge you an extremely high-interest rate. The maximum value of annual percentage or rate has crossed over 700%. So, it can ruin your financial career if you once miss out on a payment.
- Misleading: Some lenders can mislead you and charge you hidden fees. As a result, you may enter into a debt trap.
- Lead to debt trap: Financial advisors always warn their clients not to take a payday loan because it can lead to a debt-cycle and ruin your financial career. So, instead of applying for a payday loan, you can arrange money from your friends or family.
- Discrimination: Reports show that payday loans are found mostly in minority communities and charge interest rates differently. Some lenders charge one interest rate for some people while charging higher for other peoples based on the minority communities.
- Lenders have access to your bank account: Last but not least, payday lenders have access to your bank account, and that can lead to extreme overdraft fees at times.
Now that you know about the pros and cons of payday loans decide whether you should take a payday loan or not.
FAQs On Payday Loans
These are some frequently asked questions about payday loans. These questions will bring more clarity before you apply for a loan.
Can You Go To Jail For Not Paying Back Your Payday Loans?
The regulating body of Payday loans clarifies that a consumer is not liable to go to jail for defaulting a payday loan. It’s not a criminal offense as per the Consumer Financial Protection Bureau.
Are Payday Loans Harder Or Easier To Pay Back?
Sometimes payday loans can be hard to pay back because the lender fail to verify your potential to repay. Lenders generally evaluate your DTI ratio before they allow you to get a loan.
How Can I Get Payday Loans Instantly?
You can get your payday loan either online or from the payday loan center. However, if you want instant cash or money, you can visit a payday center. You can receive your loan on the same day if you apply online.
The Bottom Line
Hopefully, the above information has helped you to understand payday loans and how to apply for them. Remember, payday loans charge higher than other consumer loans and can lead to a debt-cycle. So, you need to be responsible and repay them on time and avoid them if you have alternative debt options.