When you’re short on cash and have an unavoidable expense to meet, what’s the first thing that comes to mind? A payday loan? Well, it’s true that payday loans can be a lifesaver when you’re in urgent need of cash. They provide quick relief from the cash crunch and cover you until your next payday. But remember, these loans also come with high fees and interest rates. So, before you turn to payday loans for relief, understand them thoroughly.
What are payday loans?
These are short-term loans, usually under $500. They’re called payday loans because they’re meant to bridge the gap between paychecks. These loans are also called by other names including, cash advance loans, deferred deposit loans, and check advance loans.
How do they work?
Payday loans allow you to take a cash advance from your upcoming paycheck. These loans differ from one state to another. But wherever you go, these loans are fundamentally characterized by three main features: short repayment term, small loan amount, and easy qualification. When you apply for a payday loan, the lender verifies your income, checks your account information, and delivers the amount you need in a matter of minutes. However, in exchange for the amount, you will be asked to provide a signed check or permission to withdraw money from your account electronically. You’re required to repay the loan immediately after your next payday.
Who uses payday loans?
According to a study by the Pew Charitable Trusts, about 12 million Americans use payday loans every year. In general, anyone with a steady income and a checking account can opt for a payday loan. As per the study, the most common borrowers are those without credit cards and savings accounts.
Qualification Criteria for Payday Loans
To qualify for a payday loan, you should be at least 18 years of age, have a steady income and an active bank account. You will be asked to provide an ID, and proof of income. However, meeting these criteria does not guarantee you a payday loan. Your loan application could be rejected for one or more of the following reasons:
- Lack of sufficient income
- Previous outstanding loans
- Recently bounced checks
- Recent bankruptcy
- Insufficient period of employment
Why or Why Not to Choose Payday loans
| Pros | Cons | |
|
|
A quick and easy method to borrow cash for urgent needs such as a medical bill, car repair, etc. |
Very high-interest rates and fees. More expensive compared to other loans. |
| 2. |
Very helpful for people who don’t have a credit card or savings account. |
Failure to repay on time can result in huge additional fees |
| 3. | Require no credit check and therefore easy to obtain |
Improper management may cause larger financial problems |
No doubt payday loans present a great opportunity to meet urgent financial needs between paychecks. But also consider other methods of borrowing which come with lower APRs, such as personal loans. If you have no choice but to take a payday loan, do it with caution.