Payday loans are essentially small, unsecured loans that are meant to act as cash advances until your next payday arrives. Most payday loans tend to come in small amounts, usually a few hundred dollars, so they are mostly suited for dealing with small expenses such as utilities, food or medical bills, urgent car repairs, etc.
These loans also don’t have stringent eligibility requirements and don’t require you to put up any collateral, either. As a result, even borrowers with bad credit can access instant online payday loans with guaranteed approval, but the trade-off is that they also tend to come with very high-interest rates and short-term repayment periods.
However, it is also important to note that the rate of default for these types of loans is generally low these days, mainly because most states have started to heavily regulate payday loan interest rates.
How Do Payday Loans Work?
There are a few key differences to consider when borrowing payday loans compared to the traditional loans that you can typically apply for at a bank or credit union. The main difference lies in the fact that most consumers usually buy and take out payday loans from CocoLoan and other similar online lending sites rather than visiting a physical storefront.
Furthermore, unlike bank loans, payday loans are heavily regulated, with different states having their own laws that limit how much you can borrow or how much interest the lender is allowed to charge. In fact, some states even prohibit payday loans completely.
Aside from that, these loans are also due in full when payday arrives, which is in contrast to traditional loans that can usually be repaid in small increments over an extended period of time. You should also keep in mind that these loans also tend to come with a finance charge that tends to be based on your loan amount.
How Much Money Can I Borrow with a Payday Loan?
Payday loans will usually range from $50 to $1,000, but this can vary depending on your respective state’s laws. Some states have a payday lending cap, while others do not.
For instance, states like Wisconsin, Utah, Maine, and Wyoming don’t have a cap, while states like Montana and California come with a $300 cap. It is often best to check your local state laws to find out how much money you can legally borrow.
If you come across a payday lender that offers above your local state permits, then you should completely avoid them, as it can potentially lead you to fall into bad debt.
What Is The Cost of Taking Out a Payday Loan?
The cost of borrowing a payday loan will usually vary depending on state laws, but you can often expect the fees to range from $10 to $30 for every $100 borrowed. However, before you decide to borrow, you should make sure that your lender fully discloses the APR before you sign the loan agreement.
You should also take other financing options into consideration, as the interest rates on offer tend to be higher than average. For instance, some lenders charge APRs of 400% or higher, so it is important to weigh out other credit options to see if you can find a more affordable loan.
Can Payday Loans Affect My Credit Score?
Most payday loan lenders will not refuse to grant you a loan just because of a poor credit score. They often don’t conduct credit checks, and most of them are unlikely to report on-time payments to the relevant credit bureaus, either. As a result, they don’t usually have any impact on your credit rating.
However, while these loans can often be tempting, especially when you need quick cash, it is important to keep in mind that failure to repay the loan on time and get a loan rollover can place you in serious trouble. For starters, if you miss a payment, most payday lenders will charge you a late payment fee that can often be so high that it can end up raising the cost of your loan significantly.
On top of that, while payday lenders do not report on-time payments, they are likely to report failed payments to the relevant credit bureaus. If they are still unable to recover their money, they may also end up referring your case over to a debt collection agency, which can take you to court.
If this happens, a fresh collection action can end up severely damaging your credit rating, which will only make it even more difficult for you to secure credit in the future. It is for this reason that you should only ever take out a payday loan if you are confident that you can afford to repay it once your next paycheck arrives.
You should also set up an automatic payment plan with the lender, which will ensure that the money is taken out of your account on time and you don’t end up missing a payment.
What Options Can I Use To Repay My Payday Loan?
If you discover that you are struggling to repay your payday loan, one of the best solutions that you should consider is to consolidate your debt.
There are a number of lenders, such as those in CocoLoan’s network, that can offer you debt consolidation loans at lower interest rates and longer repayment terms than payday lenders. So, if you cannot repay the loan yourself, you can consider applying for one of these loans to get some breathing room.
The added benefit of this is that, unlike payday loans, any on-time payments that you make on these loans will usually show up on your credit report. As a result, you should be able to build up your credit score in the process.
What Other Alternative Loan Options Can I Use?
If you don’t want to apply for a payday loan, there are a few alternative options that you can consider that can meet your needs and also help you save money on interest.
#1. Family or Friends
You can reach out to a friend or family member and ask them to provide you with financial assistance. And while this can be an uncomfortable experience, the benefit is that they are unlikely to charge you any interest and are more likely to be open to flexible repayment terms.
However, you should always make sure to put the loan agreement down on paper to ensure that both parties know where they stand and that you don’t end up damaging your relationship.
#2. 0% APR Credit Cards
Another alternative option worth considering is to apply for a 0% APR credit card. These cards come with a 0% introductory period that typically lasts for about 12-15 months and allows you to make purchases without having to pay any interest on top.
They can be very useful if you need a quick cash injection and want to save yourself money in the process. However, keep in mind that you need to repay the entire balance before the intro period ends, otherwise, you will end up paying interest on whatever balance is left.
#3. Bad Credit Loans
You can apply for a bad credit loan via a lending service like CocoLoan since their partner lenders specialize in working with borrowers that have a history of bad credit. These loans tend to come with high-interest rates, but they are more affordable than payday loans and come with longer repayment periods.