How Does A Payday Loan Work?
Sometimes you may need extra money to address unplanned car or house repairs, medical bills, and more. Most people have an emergency fund to cater to such scenarios. However, you may be forced to look for financing elsewhere if you don’t have any money set aside for such emergencies.
When employed, you may look for a loan to bridge such a gap and get you going until your next payday. That’s where a payday loan, such as from a loan app with fast approval, becomes useful.
This post outlines what you need to know about payday loans. You’ll learn what payday loans are, how they work, and their benefits. Keep on reading to learn more.
What Are Payday Loans?
A payday loan is a short-term financing option that can help you cover expenses until your next pay arrives. They usually have higher interest rates and fees than traditional bank loans. Also, the lender extends the interest credit based on your income.
Here are some of the main features of payday loans:
- Potential To Roll Over An Outstanding Balance
Some loan providers may allow you to renew your loan by paying an additional finance charge to prolong the repayment period. Nevertheless, this will vary from one lender to another.
Do keep in mind though that rolling over a balance can lead to a cycle of debt that’ll be very difficult to escape from.
- Access To Your Checking Funds
When you get a payday loan, the lender will directly access the money in your checking account. Thus, if you can’t repay the loan, the lender can debit your account.
Today, technology has transformed how you can access payday loans. Now you can use a loan app with fast approval process, guaranteeing you have enough money to cover emergency expenses.
How Do Pay Loans Work?
A payday loan functions differently from personal and other consumer loans.
When you apply for a payday loan, the lender will require you to show only proof of income and identity. In most cases, you can use your pay stubs from your employer. Since the lender won’t check your creditworthiness, they usually have higher interest rates.
Depending on where you live, you can get payday loans online or through a physical branch. Once the lender approves your application, you’ll receive cash or a check or deposit the money into your bank account. Then, you’ll be expected to pay the debt in full plus the interest by its due date, typically 14 days or by your next payday in the month.
Payday loans have a finance charge based on your loan amount. As mentioned above, payday loans have short loan terms, which usually translates to a steep Annual Percentage Rate (APR), with some reaching 400%.
How Much Does Payday Loans Cost?
Payday loans usually have a short loan amount of between USD$500 to USD$1000. Yet the actual amount varies from one state to another.
When you borrow a payday loan, you must pay the loan amount plus the accumulated charges. In this financing option, the lenders don’t typically charge traditional interest on their loan. Instead, they calculate the fees to borrow and add them to the balance you have to repay.
For instance, say a lender charges USD$10 for every USD$100 borrowed. That means you’d have USD$100 in interest rates and fees for a USD$1,000 loan. And you’ll have to repay the whole amount on your next payday.
What Are The Benefits Of Payday Loans?
Now that you understand how a payday loan works, it’s time to discuss its advantages. They include:
- They’re Easy To Access
As mentioned above, you can use online platforms to access a payday loan, regardless of the location. Plus, it has an easy approval process, guaranteeing you have money even on the same day. This makes payday loans ideal to cover unexpected expenses such as car breakdowns and so on.
- Payday Loans Are Ideal For People With Poor Credit
If you have bad credit, it might be challenging to get financing. Plus, if you get one, it’ll have higher interest rates, forcing you to pay more in the long run.
On the other hand, the lender doesn’t check your score when you apply for a payday loan. They’ll only require you to prove your income instead.
Bottom Line
People use emergency funds to cater to unplanned expenses such as car repairs. Yet if you don’t have any money set aside for emergencies, you may have to look for another financing option, such as payday loans.
Payday loans allow you to cover expenses until your next paycheck. Nevertheless, before signing up for a payday loan, it’s imperative to ensure you understand how they work and the charges involved.
