Here, learn about payday loans and if they are a good idea. These short-term, very high-interest loans can provide quick access to cash. They can also be expensive and potentially make financial struggles worse.
What is a payday loan?
A payday loan is a loan issued based on your paycheck.
It is a short-term, high-cost loan, and most of the time it is for $500 or less and is due on your next payday. Basically, you ask a lender to lend you money and agree to repay the loan out of your next paycheck. The lender agrees to lend you the money but charges you a high interest rate. When your next paycheck date comes around, they will take the amount they lent you, plus interest and fees, directly out of your paycheck. Getting a payday loan can be very expensive. You should consider other ways to borrow before you get one of these loans.
How do payday loans work?
You ask a lender to give you a payday loan, and they request your pay stubs to see how much they can lend. To secure the loan (to make sure you will pay it back) they will require you to give them a check for the loan amount plus fees for lending you the money. Some lenders will require you to authorize them to electronically debit (charge) the funds from your bank account, credit union, or prepaid card account. The lender will then cash your check or debit your account if you have not paid the loan amount before the due date.
Who needs payday loans?
Most of the time, people who are requesting a payday loan have some kind of emergency, need help paying their bills, or need cash immediately and will seek out a payday loan. People will often seek out additional sources of income during festive months.
How do you get payday loans?
You look for a lender that offers a payday loan. Apply, and submit all necessary information. Once approved, you will receive the loan directly in your bank account or in cash.
Are payday loans a good idea?
Someone seeking a payday loan may already be having a hard time making ends meet. Because the interest rates on payday loans are so high, getting one of them will make it even more challenging to have enough money left over after the lender receives the money owed. This can make it extremely difficult for you to make ends meet after the lender gets their share.
What if I cannot pay the loan by my next paycheck date?
Most lenders will charge you a late fee for not paying on time. If you need additional time to pay, some lenders will give you the option to “roll over” the loan to your next paycheck date. However, you must contact the lender if you cannot pay it off by the due date. Late fees are incurred for late payments, and you will be charged a fee for insufficient funds if any payment is returned. If the “rollover” option exists with your lender, they will extend the loan and charge you the fee again. Every time the loan is extended, the same fee is charged. These fees add up! Before long, you may owe more in rollover fees than you originally borrowed.
John Doe’s truck broke down, and he needs money to fix it. He asks for a $500 payday loan. His loan will be due on his next payday. Lender lends him the $500 and charges him $75 to lend him that amount. When John’s next payday arrives, he will have to pay Lender $575.
John’s next payday arrives, but he cannot pay the loan and asks the Lender to give him more time. The Lender gives John the option to refinance and charges him another $75. John has another emergency happen and cannot afford to pay the loan. He asks for another two weeks and pays another $75. Every two weeks, he pays another $75 fee. By the time John can fully pay the original loan amount of $500, he has paid the Lender more in fees than what he first borrowed.