Payday loans are unsecured, short-term, personal loans taken against one’s income. They’re typically repayable on your next payday. Payday loans are a good option when you need cash quickly or have exhausted all other alternatives. Unlike traditional loan applications, people with poor credit ratings can apply for these loans.
However, you should familiarize yourself with everything there is to know about payday loans before applying for one. This helps you weigh their pros and cons to determine whether they’re a good borrowing option for you. Here are five things you should know about payday loans.
- How payday loans work
Payday loans, such as weekend payday loans, are available online. Other lenders provide in-person application options. While your credit rating isn’t a significant factor in payday loans, some lenders may do hard credit checks to see your credit score. Lenders usually require proof of income (pay stubs from employers) to determine the portion of your earnings to lend you. You’re required to repay the loan within 30 days. Since lenders don’t consider your ability to repay the loan, they charge high-interest rates. You may be charged high fees for a rollover if you miss your repayment.
- Payday loan basic qualification requirements
Payday loans, also called post-dated check loans, cash advance loans, check advance loans, or deferred deposit loans, are quick and easy to qualify for. Most payday lenders need you to be 18 years old and above, provide proof of income and valid identification, and possess an active checking account to qualify for the loan. Once the lender reviews your application and verifies your details, your loan may be approved within minutes or hours, depending on your lender’s policies.
- Payday loan risks
While payday loans are suitable for fast cash needs, including financial emergencies, they come with risks. They have high hidden fees and interest rates, significantly derailing your credit score and financial health. Payday loans have high default risk. If you can’t repay the loan, there’s a danger of becoming a long-term financial drain. This is because, besides the high-interest rates, you’ll have rollover fees, which can be high. If you keep rolling over your loan, you end up in a vicious debt cycle that’s difficult to get out of.
- The cost of payday loans
While getting approved for payday loans is easy, the high-interest rates attached to them make them quite costly and hard to repay. Payday loan interest rates vary by state, and can be as high as over 600%.
While some states have laws limiting payday loan interest rates and fees, others don’t. Interest rates and hidden costs can be very high for states without rate capping. Payday loans have many hidden costs. You should ask your lender to disclose all the finance charges. With this information, you can determine the exact cost of your loan.
- Payday loan alternatives
High payday loan interests and fees make them predatory. Looking for other options can prevent you from falling into a debt trap. If you need money quickly, you can get a credit card cash advance, get a loan from family and friends, ask for an advance salary, get a personal loan, leverage your 401(k), or find other payday loan alternatives.
Payday loans are convenient and ideal for immediate cash needs. Familiarize yourself with what you need to know about payday loans before applying to make informed borrowing choices.