A payday loan is a short-term, high-rate loan, usually less than or equal to $ 500, designed to bridge the gap between paychecks. The quick injection of funds is a good thing, but when you apply for a payday loan, you risk getting more than you expected.
As indicated by the Office of Consumer Financial Protection on its website, these loans generally involve small amounts but allow lenders access to your checking account or ask you to write a check of the full balance in advance, that the lender can deposit at maturity of the loan.. Even worse, payday loans have extremely high interest rates, some of which cost up to 400%. It’s a big investment for a cash-strapped consumer. Although state laws and other factors affect fees, you will want to sign a payday loan agreement carefully.
Payday loans for people with bad credit now
In this article, we’ll see how payday loans, including payday loans for bad credit, work and why he has a good point.
There are many conditions for this type of credit – payday loans, pre-loans, pre-check loans, deferred deposit loans, or post-dated check loans – that you can obtain from a variety of sources. Whether you visit a payday lender store or apply online, the process is basically the same: you provide personal and financial information, ask for a loan for a certain amount (secured by check or debit authorization from a bank account), pay a fee for the loan and receive the money or deposit into your bank account.
There are several factors that determine how much you can borrow, but your credit is not included, as the phrase “no credit check” indicates. (“No Credit Check” and other terms such as “fast cash” and “easy” are usually the main selling points in payday loan ads and are part of what makes them attractive to borrowers, although that the new rules proposed by the CFPB in 2016 require a term lenders to measure the repayment capacity of a consumer in some cases.)
Payday loans can be very expensive. Loan amounts typically range from 50 to 1,000 euros, depending on state laws. The fees also depend on state laws, but the structure may be something like € 15 per 100 € loan, and some states may cap the amount of fees. As the loans are short-term, the cost of borrowing is generally high. A typical payday loan with a two week term and a fee of € 15 per € 100 has an annual percentage rate (APR) of almost 400%, according to the CFPB. (Here’s an introduction to how interest rates work.)
How do payday loans work?
Suppose your car breaks down and you decide to borrow $ 300 for repairs from a payday lender. You will write a post-dated personal check for $ 340 (the amount, plus a $ 40 financing fee), payable to the lender. You enter this information online when applying for an internet payday loan. The lender then advances you 300 € for a given period, usually 14 days. At the end of this period, you pay the cash lender $ 340, let them deposit the post-dated check or write another post-dated check for the amount plus additional financing fees.
If you do not pay the entire debt at the end of the term, you will be charged additional fees.
Who uses these types of loans?
Twelve million Americans use payday loans every year, according to Pew Charitable Trusts. Generally, anyone with a current account and a stable income can get a payday loan. However, it is common for borrowers who do not have access to credit cards or savings accounts to use this type of loan. “Payday loans for bad credit” are attractive to people without credit or credit problems.
The Pew report revealed these common characteristics among payday borrowers:
- Earn less than 40 000 € per year
- No four-year college diploma
- Separated or divorced
According to this same report, the average borrower contracts eight loans of 375 euros and spends 520 euros in interest only at the time of repayment of the initial credit.
What are the benefits?
Payday loans can be a good tool to borrow money quickly and easily in an emergency if you do not have other financial options. For example, you can use a payday lender for an immediate and temporary financial need, such as a medical bill, auto repair or any other one-time expense. Payday loans are useful for people who do not have a credit card or savings. Because loans do not require a traditional credit check, they are easy to obtain for people with financial problems.
What are the negatives?
It is essential that you repay a payday loan as soon as possible. Many people have problems with this type of loan when they are unable to repay their debt quickly. If you can not repay the loan at the end of the period, you will be charged a high additional fee. It is very expensive to stay stuck in a payday loan cycle for a long time and can lead to bigger financial problems.
Payday loans are also much more expensive than other methods of borrowing money. In most cases, the annual percentage rate (APR) of a payday loan is approximately 400% on average, but often reaches 5,000%. The APR for credit cards can range from about 9% to 30%; personal loans generally have a lower APR than credit cards. If possible, it is best to use a credit card or draw on your savings in an emergency.
What about the laws on usury?
Several states have specific laws governing the lending sector. Known as “usury laws”, these regulations define the conditions and loan rates allowed. Some states also have laws that regulate the amount that a payday lender can lend to consumers and the amount they can claim for the loan. Other states, like New York, totally ban payday loans. These laws vary a lot. Payday lenders often circumvent these regulations by partnering with banks based in other states, such as Delaware. It is important to read the fine print of the payday loan offer and understand your rights as a consumer.
Should I apply for a payday loan?
Before considering a payday loan application, take a step back and consider your options.
Ask yourself if this is really an emergency. Payday loans can be helpful for one-time emergency costs such as medical bills, but are not a good idea to fund unnecessary expenses. Is it possible to wait for the repair of your car or the payment of your bills until the receipt of your next paycheck? Late fees on an invoice may be less expensive than financial charges for a payday loan. Think of other ways to borrow money bearing in mind that they will have different fees, benefits and harms.
Alternatives to payday loans
- Negotiate a payment plan with the creditor
- Charge the amount on your credit card
- Receive an advance from your employer
- Use the overdraft protection of your bank
- Get a line of credit from a lender approved by the FDIC
- Borrow money from your savings account
- Ask a parent to lend you money
- Request a small traditional loan
- Ask your creditor for more time to pay an invoice
- Use a cash advance on your credit card
If you have assessed all of your options and decided that an emergency payday loan is right for you, make sure you understand all the costs and conditions before applying.
Shop for a trusted lender that offers lower rates and fees.
Borrow only to the extent that you know you can pay off your next paycheck.
When you are paid, your first priority should be to repay the loan immediately.
How can I prepare for financial emergencies?
You can not always predict when an emergency will occur, but you can prepare for it. Ideally, you should keep enough money to cover your household expenses for two months or more on a savings account. If this goal is too high, try to save at least the amount of a paycheck. It is also a good idea to have some credit cards available for unexpected costs.
If you do not have a credit card, you can search for a credit card online. And remember, even people without credit or bad credit can get credit cards.