What is a payday loan?
A payday loan is a form of short-term borrowing where the lender offers high interest credit based on your income. Usually the loan amount is a part of your next paycheck, they are also called cash advance loans or check advance loans.
As an unsecured personal loan, the interest rates charged by payday lenders are usually very high. Many consider them to be a predatory form of lending because they do not take into account the borrower’s repayment capacity and are not always upfront about additional charges. This is compounded by generally high interest rates and can leave consumers in the debt trap.
How payday loans work
Payday loan providers are often small credit merchants who can operate from a physical location or online. Borrowers must prove their income by providing recent pay stubs, however, lenders typically do not do a full credit check or affordability check.
The interest rates on payday loans can vary wildly and can be as high as 780% as an annual percentage. Although most states in the United States have usury laws that limit interest charges to 5-30%, payday loans are exempt. This means that they can charge much higher interest rates.
Designed as short term loans, payday loans generally last for more than 30 days or less and are used by people who need immediate cash to meet their short term debts. Loan amounts are typically between $ 100 and $ 1,000, and it is common for loan fees to be around $ 15 per $ 100 of loan.
For example, a borrower takes out a 14-day $ 300 payday loan to pay for car repairs. Assuming an average fee of $ 15 per $ 100 borrowed, if the loan was paid on time, the repayment would be $ 345. However, if the borrower couldn’t pay it back on time, a rolling charge of $ 45 would be applied, meaning it would now owe $ 390, plus any late fees the lender could charge.
Benefits of payday loans
The benefits of payday loans are limited but include:
Collect money immediately
If a person needs money immediately to pay an unexpected bill or to pay for car repairs, payday loans can give them that money. Short-term personal loans are a better option, but may not always be available for people with bad credit history.
Disadvantages of payday loans
The disadvantages of payday loans include:
High interest rates and fees
Payday loan providers are not always transparent about their interest rates or fees. Including their standard fees and the fees they charge if you don’t pay back the loan within the timeframe you agreed to when you took out the loan.
Can leave consumers in the debt trap
Taking out a payday loan can be the starting point for consumers to fall into the debt trap. A borrower takes out a payday loan because he needs instant cash, but that money usually needs to be repaid within 30 days so that the payment is taken from the next paycheck, which will leave it short for the month. next and will likely need another payday loan.