You may have seen advertisements or signs around town for cash advance loans, or payday loans. If you have never looked into this option before, you may be wondering, ‘What is a Payday Loan?’ There are a few things you should know before considering or accepting a payday loan.
Basically, a payday loan (also known as a cash advance or check advance loan), is an extremely short term line of credit, lasting only about three weeks. Traditionally, a lender will extend a high interest credit based upon your income and credit profile. The lender will verify your income and your bank account. This is to confirm you will be able to pay them back as soon as you are able. The application process is very short, and can usually be completed in just a few minutes. The lender will be able to extend the loan amount that you need into your confirmed bank account immediately. Many people in America work from paycheck to paycheck, and without any credit history or savings, it may be difficult for them to come up with emergency money that may be needed if something comes up in their life that is unexpected. While it does sound like a good idea if you need cash right away, there are some negatives to accepting a payday loan.
Why should I get a Payday Loan?
If you are in an emergency that requires you have money right away, it might sound very appealing to get a payday loan for quick cash. However, you need to keep a few things in mind before you apply. Payday loans are sometimes called predatory loans because they tend to charge very high interest rates. For example, if you were to get a loan for $300, with added interest and sometimes provisional fees attached, you may expect to pay the lender back more than $400. Most lenders will require you to fill out a post-dated check with the amount you will be repaying, along with your interest, dated at or around the time that you will be receiving your paycheck. While in the short term the interest rate is smaller (around 15%), in the long term it may prove to be much greater. Yearly interest rates for payday loans can reach up to 500%! One situation that the lenders are desiring is that you will continue to borrow from them in the future. Many people fall into this category simply because it can often take a second payday loan in order to pay off the first. There are more regulations being put into place concerning the high interest rates and the charging of fees, but you need to keep in mind just how much more you, as the borrower, will be paying out in the end. Also, if you are unable to repay your payday loan back in time, you can expect to be hounded endlessly and aggressively by collections agents to ensure that you pay them back as soon as possible.
In nearly all cases, it would be best to avoid the payday loan. It sounds like a good idea if you are needing quick cash, but with the added fees and high interest rates, it is simply not worth looking into. Being wise with your earnings and creating a savings account is a much better idea. It will require commitment and sacrifice but when a financial emergency arises you will be glad you did. Building a line of credit is also a smart idea. It will take some time, but when you consider the alternative of a payday loan it is completely worth it.