Payday Loans

What is a payday loan?

A payday loan -also known as a cash advance or payday advance loan-is a short term and unsecured loan. They are considered short term because of their small duration budgeting basics and payday loans are usually due in two weeks- and they are considered unsecured loans because the lender can’t sue you for your personal property if you can’t pay it back,

Most payday loans are for small amounts of money, around $100 to $500. and have a high-interest rate because of their high risk for the payday loan lender. The high risk stems off from the few requirements to access a payday loan.

Payday loans are not given by banks but by other financial entities.

How do they work?

Accessing a payday loan is fairly simple. The first thing you have to do is fulfill the requirements asked by the lender. They are fairly easy to meet. Usually, if you are 18 years old or older, have a valid ID or a social security number, and have a bank account you are qualified for a payday loan. You also need to provide proof of a regular job or any other source of income that shows you can pay back the loan.

If you meet the requirements, all you have to do is bring the necessary documentation to the payday loan location and ask for the amount of money you need. Depending on where you ask for it, the payment method may be different. Some places will ask you to write a post-dated check with the payment amount -including everything: the money, interest, fees, etc.- other places will have you fill an authorization form so they can debit the money from your bank account or credit card once the loan is due.

If you have poor credit or no credit at all, it does not mean you don’t qualify for a payday loan. Usually, these kinds of places do not check for your credit score.

-What are the interest rates?

The interest rate charged by payday loans is the sticking point of the subject. The good thing is that they are easy to access and almost everybody can get one. The bad thing is that they are nowhere near cheap and it is because of the nature of the financial operation. Most payday loans have a certain risk when it comes to getting the money back. A high chance of default (the user not paying the loan) increases the risk and thus the interest rate in any financial operation. Payday loans are not the exception.

The average payday loan annual interest rate is 391%. That is a lot. But you have to consider two things. First, that is the annual rate and you will pay your loan back in two weeks, which leaves the interest rate for the duration of your payday loan at 16%. It is still a little high, but if you factor in you won’t ask for much money it does not seem like a big amount to pay back. If you ask $100 for two weeks at a 391% annual rate, you’ll have to pay back $116 after the fourteen days have passed.

-Are they bad?

Nothing is inherently good or bad. A payday loan is like a hammer, it is just a tool. If you want to avoid a bad experience the best thing you can do is understanding how and when to use it. And why would you want to use it.

You need to understand the good things about payday loans -their unsecured category, low requirements, and almost full-time access- and the bad -the interest rate-before you decide to ask for one. If you plan it out in advance and use the loan wisely, it won’t hurt that much. But you have to understand you cannot depend on payday loans to secure capital or build a business. They are for emergency scenarios.

-A good strategy regarding payday loans.

The best way you can get a payday loan is planning for it. Even though it might sound hard as payday loans are usually asked in an emergency or a last-minute scenario, you have to do it with a cold mind. You have to calculate how much money you are going to pay back, when are you going to set the due date and if there is going to be any trouble paying it back. Don’t ask for $100 and go on with your day. Ask for $100 knowing you’ll pay-for example- $116 in two weeks. Do not place the due date the same day your paycheck arrives, place it a day or two afterward, to avoid any problems like not being able to cash your check for whatever reason.

If you plan it in advance, you won’t have any problem with payday loans. The worst thing you can do is not taking the payday loan seriously as it can become a problem later on, like any other loan.

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