Have you heard that payday loans are a great way to get money with no collateral? If you’re thinking of asking for one, you may want to read this before you do.
A payday loan, (also called a cash advanced loan or check advanced loan), typically, is a portion of a borrower’s next paycheck. This type of loan charges high-interest rates for short-term immediate credit.
Understanding payday loans
Payday loans charge borrowers high levels of interest and do not require any collateral, making them a type of unsecured personal loan. These loans have a reputation for extremely high interest and hidden provisions that charge borrowers added fees.
How to obtain a payday loan
Payday loan providers are usually small credit merchants with physical locations that allow onsite credit applications and approval. Some may also be available through online lenders.
To qualify for a payday loan you typically need an active bank account, an ID, proof of income such as a pay stub and you must be at least 18. Payday lenders often base their loan principal on a percentage of the borrower’s predicted short-term income.
Payday loan Interest
Payday lenders charge borrowers very high levels of interest that can range up to 500% in annual percentage yield (APR). Most states have usury laws that limit interest charges to less than approximately 35%; however, payday lenders fall under exemptions that allow for their high interest. A number of laws have been put in place over the years to regulate the high fees and interest rates.
Some court cases have been filed against these lenders since lending laws following the 2008 financial crisis have been enacted to create a more transparent and fair lending market for consumers.
The really bad part about payday loans
If all that's been said isn't enough to talk you out of this type of loan, there's one last thing you should know. People who take payday loans often get locked into an ongoing cycle. Usually, these loans can be rolled over for additional finance charges, and many borrowers end up repeat customers. One payday loan creates the need for a second, and so on.
Payday loans may seem like an easy way out of debt, but they should probably be your last option. There are many alternatives you can check out before choosing these unsecured personal loans.