No matter how wise you are in managing your money, you will have a few financial setbacks at some point. It could be a family member getting into an accident, an unexpected visit from relatives, an emergency trip to be with a loved one or even something as simple as your car breaking down. The thing is, there will be some rough spots along the way and you might not have enough money to cover them.
Good thing, you can already take advantage of payday loans to help you get through that setback and buy you some time to get back on track financially. But before you jump into the bandwagon, here are five things you need to know about payday loans first:
What exactly is a payday loan?
Lenders know that there are people who go through a rough financial spot but don’t necessarily need a huge amount of money nor a long payment term to help them through it. This is why they created a payday loan. Sometimes called a cash advance or post-dated check loan, a payday loan lets you borrow money to use for unplanned expenses and you can pay it when your next payday comes.
How does a payday loan work?
Payday loans are very straightforward: you borrow money and pay it on your next payday. Most lenders will ask you to write a check equal to the amount you want to borrow plus the interest fee. This is their guarantee that you will pay when you get your next paycheck. There are times, however, when you will be allowed to extend your repayment but interest rates will keep growing and you might incur a few additional charges along the way. This is why it really pays to read all the payday loan terms before borrowing money to make sure that you don’t get into more debt than you would like.
What are the benefits of a payday loan?
Perhaps the biggest benefit of getting a payday loan is convenience. Since lenders understand that you need the money quickly and you will be borrowing it for a shorter time than most loans, they are a little leaner when it comes to qualifications. Most lenders don’t require that you have a good credit score to be approved for a payday loan, so you have a better chance at qualifying compared to more traditional loans.
What are the risks when applying for a payday loan?
While applying for a payday loan is quick and easy, it still comes with a few risks, the biggest o which is cost. Getting fast approval means paying more than the traditional but stricter loans. If you look closely, you could end up paying a very high annual percentage rate (APR), especially if you don’t pay on time.
This means that a $100 loan could have an APR of more than 500% depending on the terms of the loan. Another risk is the interest rate, which is relatively higher than a regular loan. This is why if you have other means to raise the money you need, it’s best to make the payday loan your last resort. But if you really need to take out a loan to get you through a rough patch, make sure to do your research and make your repayments on time.
What are the rules for payday loans?
There are both state and federal laws for lenders who offer payday loans. For instance, lenders are required to reveal the charges and APR in writing, according to the Truth in Lending Act. There is also a Payday Rule implemented by the CFPB that imposes strict restrictions on payday lenders.
Although this has been challenged by the payday loan industry, the rule is meant to protect people borrowing money by making sure that they are charged fairly. Laws and rules may also differ for every state, so it’s best to learn about the laws in your state before applying for a payday loan.
At the end of the day, you get to decide if a payday loan is right for you or not. Of course, there are other options to raise some funds before you apply for a loan. You can keep a credit card only for emergency purposes, ask help from family and friends, negotiate a payment plan with the people you owe money from or set aside an emergency cash fund from your savings account so you are sure to have money whenever unexpected expenses come.