What Is a Payday Loan and What Are Safer Alternatives?

Payday loans, which are short-term loans of no more than $500, are considered predatory by many financial professionals due to the high interest rates and fees. Because these loans don’t require credit checks, they are often marketed to people with poor credit or little credit.

What is a Payday Loan?

A payday loan is a short-term, small loan that you pay back on your next payday. It can take up to two to four weeks.

These loans typically cost $500 or less, and have high fees. This equates to an annual percent rate (APR ) that can reach as high as 400%. The APR for traditional personal loans is usually capped at 36%. Finance experts consider this the most affordable rate.

These features are also common in payday loans:

  • You have direct access to your checking account funds. Most payday lenders require that you write a post-dated cheque or authorise them to debit your account.
  • Possibility to rollover an outstanding balance: According to state laws, payday lenders may allow borrowers to “roll over” their loan or renew it by charging an additional finance fee to extend the repayment period. This can lead to a cycle where you borrow more money to pay off your debts.
  • Don’t usually require credit checks: This allows them to be accessible to poor-credit borrowers. However, the payments will not appear on your credit reports, so they won’t help build credit.

What is the process of payday loans?

Payday loans don’t require credit checks. Only applicants need to have a bank account, and be able to prove their income and identity. Payday lenders won’t verify your credit so they are taking a chance on you promising to repay. They charge high interest rates to compensate for the risk.

Many financial professionals warn against payday loans online because of the high interest rates and short repayment terms that can trap people in debt cycles. Consumers may have to transfer their payday loan into another loan in order to repay the original.

What is the cost of a payday loan?

Payday loans’ costs can vary from one state to the next. Some states have limits on the amount consumers can borrow, and what fees lenders can charge.

Fees are often charged at a flat rate in many states. They typically range from $10 to $30 per $100 borrowed. The Consumer Financial Protection Bureau states that lenders often charge $15 per $100 borrowed.

This fee will not be charged upfront. The APR for payday loans typically includes the interest rate as well as any fees. Payday loans can have an APR as high as 400%.

The cost of a payday loan, including interest and fees, will vary depending on where you live. These loans are not available in all states.

Pew Charitable Trusts examined data from payday lenders in states that allow payday lending to determine how well the laws protect payday loan borrowers. Here is a look at how much it costs to borrow $500 for four months in a handful of states. In this case, Colorado and Hawaii have laws protecting consumers while Texas and Idaho don’t.

Are payday loans good for credit building?

Payday lenders don’t usually report payments to credit bureaus so a payday loan won’t improve your credit score.

If you fail to repay your loan, your payday lender could offer it to a collection agency . This agency could report the unpaid debt to one of the credit bureaus, and it would appear on your credit report. Your credit score is determined by what you do with your credit report. This could lead to a decrease in your credit score.

If you fail to pay your debt your payday lender can sue you. If you lose the lawsuit it could show up on credit reports.

You can build your credit by taking out a credit-builder loan. Or, you can take steps to improve credit score by paying all your bills on time and reviewing your credit report for any errors.

How to get a Payday Loan

When you are considering borrowing money, make sure that you have the ability to repay it. Here’s how to get a payday loan if you are aware of the risks and you know that you have no other options.

  1. Find out the laws governing payday lenders in your state. This summary of the payday lending statutes is provided by the National Conference of State Legislatures. It will help you understand your state’s laws.
  2. Verify that the lender is licensed in your jurisdiction. Check with your state’s attorney general to see if your state allows payday loans.
  3. Compare all options. Do not just go to the nearest payday loan shopfront. Check with credit unions, banks and online lenders to find out if they offer small-dollar loans. Compare the APRs and fees of the lenders and calculate the final cost to you if the loan is not paid back within a week.
  4. Choose a payday lender. You may be eligible to apply online for a loan. Pay attention to any potential rollover fees and late fees.

Alternatives to a Payday Loan

These are other options to consider if you’re in difficult financial circumstances before applying for a online payday loans.

Payday loan alternative (PAL)

Check with your federally insured credit union to see if they offer Payday Alternative Loans. Although PALs are not always easy to find (not all federal credit cooperatives offer them), they can provide a reasonable alternative for predatory loans.

There are two types: PAL I or PAL II. They’re small-dollar, unsecured loans. PALs have repayment terms of up to 12 months, a maximum APR of 28% and are far less expensive than payday loans.

Credit card

You may be eligible to receive a cash loan if you have a valid credit card. To get a cash advance, you will simply need your card at an ATM or bank to withdraw the money.

This can be costly, however, as cash advances have an APR that is much higher than purchases. Additionally, it is likely that your cash advance will include a fee. Cash advances also accrue interest immediately, which is unlike purchases on credit cards.

You could also charge your credit card for emergency purchases. You should make sure you pay the balance every month. Interest can accrue on any excess.

Personal loan

personal loans are a great option if you need a lump sum to pay your bills. They have a 36% APR. Fixed APR personal loans make it easy to budget and predict your monthly payment.

Personal loans can be obtained secured or unsecured. A secured loan, which is subject to collateral, may be more affordable than an unsecured loan if you don’t have great credit. If your credit history has been poor or very thin, you can apply for a loan with cosigner Some lenders will work with you if you have poor credit to provide bad credit loans.

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