Payday Loans Explained
Payday loans are currently one of the most popular forms of lending, and come in various shapes and sizes. Here we offer an introduction to this financial solution, and give advice as to whether or not they offer good value for money compared to other credit products.
Also known under other names such as ‘Cash Advance’ and ‘Paycheck Advance’, payday loans are small, short-term loans that are intended to cover unexpected bills and expenses until the borrowers’ next payday. An increasing number of companies are offering loans of this type, many of which are based solely on the internet.
The way in which these types of loans differ to unsecured personal loans is that the entire amount is repaid in a single payment, usually no more than 30 days later, when the applicant receives their next paycheck. As the duration of the loan is short, the amount of the loan is also low. This can range from lender to lender, but is not usually more than $1,500.
In order to be accepted for a loan of this type, the applicant has to have a full-time job or regular income of over $1,000 per month. They need to be able to prove this by way of a recent pay slip, and also need to provide valid personal identification and their social security number.
Once the customer has been approved and the loan amount and duration have been agreed upon, the customer has to write a post-dated check for the full amount of the loan, plus the agreed amount of interest. Although the interest rate can also vary, it is usually around 25% of the loan amount for every two-week period.
The lender will then hold the post-dated check until the agreed date, before cashing it in. Some lenders allow the customer to extend their loan (known as flipping it over) for a further two-week period though some state laws do not permit this.
Payday loans have their advantages and disadvantages. On the plus side, they offer a good financial solution for those in a short-term problem for example if someone has to pay emergency medical or household repair bills. They also offer a credit option for those with bad credit, as no credit check is carried out.
On the downside, payday loans work out at an extremely high rate of APR. A $100 loan over a two-week period costs a total of $125 to repay. $25 may seem like a small interest charge, but works out at an APR of 650% – far higher than the vast majority of credit options.
For this reason, payday loans should only be considered as a short-term solution. If you have a long-term finance issue you are far better looking at a low APR personal loan and working with a financial advisor to work out a suitable monthly budget for your income and expenditure.
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