How Do Payday Loans Work

 

Learn How A Payday Loan Works

Payday loans are basically lifesavers with risky consequences for those going through a temporary financial crisis. They are short-term but high-interest monetary loan system wherein borrowers are lent a sum of money which they must pay, with interest, upon receiving their next paycheck. The borrowers’ daily income plays a big influence on the amount of money they can loan.

How Do You Quality For A Payday Loan

It is relatively easier to qualify for a payday loan than with other types of loans. All you need is your valid identification with your picture, and a proof of your income (any recent pay slip will do). Due to time constraints, borrowers will not conduct a full credit check unlike most loan types will. This move is risky for them though, which is mainly why the interest on payday loans is so high. Not to mention that most people in distress will opt to pay a high interest as long as they can get some cash immediately.

How Short-Term Is A Fast Cash Loan

The average payday loan term is around two weeks. Shorter term loans are possible depending on the agreement between the borrower and the lender. However, the shorter term loans are usually more expensive than the average two-week payday loan.

How Much Do Payday Loans Cost

Compared to your average credit card loans, payday loans are much more expensive. For a brief illustration, let’s say you have a $300 cash advance on your average credit card, to be paid in one month. The finance charge would be $13.99 with an annual interest rate of up to 57%. In a payday loan, the same $300 cash advance would cost $17.50 per $100 (typical rate is $13-$15 per $100). This means $105 if the loan is renewed once or a 426% interest annually. For most two-week loans, the interest rates range from 390 up to 780%. Remember that shorter term payday loans have much higher rates.

Paying Off Debt

Borrowers are sometimes required to write personal checks for the loaned amount, including interest and finance charge. These checks are handed over to the lender after he or she qualifies for a payday loan. The lender will then hold on to the check until the borrower’s next payday, which is the time that the lender will them deposit or cash in the check. In many cases also, borrowers will allow the lender to have access to their bank accounts. In this way, the lender can be sure that he will be paid. The typical practice is that payday loans will be paid off at one time only.

What If You Can’t Pay Back The Loan

If the borrower is unable to pay after the deadline, the lender can extend it or roll the loan over for an additional pay period. In this case, the interest is raised. If the loan is rolled over many times, the interest can exceed the actual loan amount – meaning big trouble for the debtor.