What are payday loans?
A payday loan is a short-term loan that is usually used by the borrower to cover his expenses until his next paycheck comes in, hence the name "payday loan." A payday loan is also sometimes referred to as a "cash advance" or "paycheck advance."
Who can take out a payday loan?
Because payday lenders do not do a credit check on potential borrowers, payday loans do not require the borrower to have a good credit history or any credit history. The potential borrower must be of legal age, has to show a steady source of income that meets a minimum threshold, and must have a checking account. Repayment of the loan will be made by postdated check from the checking account, or in the case of the newer internet-based payday lenders, by electronic debit from the account.
What are the benefits of a payday loan?
A payday loan is an easy way to get cash quickly in case of an emergency. Unlike most bank-funded loans which often require days of waiting for a loan to be approved and funded, in the case of a payday loan the money is usually available to the borrower within one day. In addition, payday loans are available to those who may not be approved by other lending sources due to insufficient credit history or poor credit history. Payday loans are also helpful for people who don't have access to other funding options such as savings accounts or credit cards.
What are the drawbacks of a payday loan?
Payday loans usually come with fees ranging from $25 to $30 for each $100 borrowed. This means that for a loan of $500, the borrower would repay between $625 and $650. When translated to an annual interest rate, this means that payday loans are offered with extremely high interest rates, usually averaging between 300% and 500%, but sometimes as high as 3000%. Of course, a payday loan is not intended to be repaid over such a long period; the usual repayment term is between one and three weeks. However, many people who take out payday loans find themselves unable to repay the loan at the end of the term, and they instead roll the loan and fee into a new loan which then is subject to an additional fee. This can quickly spiral until the borrower is paying thousands of dollars in fees for what was initially a loan of several hundred dollars.
What are some alternatives to a payday loan?
- Borrow money from a relative or friend
- Ask your employer for an advance
- Take a cash advance on your credit card
- Negotiate a debt repayment plan with your creditor
- Do some odd jobs on the side to earn the money you need
- Barter for the service you need by offering your skills in exchange