Are you considering applying for a payday loan? Before you do this, it is essential to understand how such loans work so that you can determine if it is your best option. Since most people survive paycheck to paycheck, they barely have enough money to cater to their daily expenses. You may find yourself with nothing left to cover for emergencies. For this reason, Americans view payday loans as their way out of financial difficulties.
Most people who get into the habit of borrowing this type of lending find themselves trapped in the cycle of debt. Before you borrow, you should look at all the possible alternatives that you have to avoid worse financial problems. We will teach you how payday loans work and give you some of the other options you can consider. Read on!
What are payday loans, and how do they work?
As the name suggests, payday loans are those that come due on your next payday. Some people call them cash advance loans. These somehow differ from normal bank lending in many ways. For instance, while you can get a large amount of money from a regular bank, payday loans come in small amounts.
According to Loanza, states that promote borrowing through this option put a limit as to how much money can be borrowed. In most cases, the cap ranges between $ 300 and $ 1000. A report reveals that the average size of such lending is $ 375. Unlike regular ones where the period of payment is extended, payday lending has to be paid on your next paycheck. The term is mostly two weeks or even a month.
If you have ever borrowed a regular loan from the bank, you probably paid it back in monthly installments. This is not the same with payday option since you don’t get the chance to pay back what you owe bit by bit. When you borrow money, you have to pay the entire amount plus interest all at once rather than in monthly installments. This can be difficult for you if you have a tight budget.
For a conventional type, the interest that the bank sets for you depends on your credit history. Borrowers with excellent scores get low-interest rates while those with poor scores get high rates. In the payday format the lender does not consider your credit score to approve you. Though people get payday loans fast, every borrower is charged the same interest rates regardless of how good or bad their credit rating is.
In most cases, payday lenders charge $ 15 as interest for every $ 100 you borrow. This amount may not sound too bad, but if you consider that you have to pay back the whole amount within two weeks, it can be disappointing. Though only your ID and proof of income are used to determine if you qualify for a payday lending, automatic repayments make this type unappealing. When you apply for this option, you have to sign a check that allows the lender to withdraw money from your bank account if you fail to make payments as agreed.
Most borrowers, however, like the fact that they can renew the loans if they don’t have money to pay it back within two weeks. Though this gives you more time to look for money to pay it back, it comes with extra fees and extra interest payments. Some borrowers end up taking up a second loan to repay the first one. This can make it hard for you to break free from them.
What alternatives do you have apart from a payday loan?
The demand for cash advances may be high, but they are not the best for everyone. If you know that you will struggle to make payments within two weeks, you should look at other options first. Instead of applying for a payday option, you can consider the following:
- Look for emergency assistance
Sometimes, it is better to ask for financial assistance from well-wishers than sinking into debt. Different community organizations and churches give people short term assistance for things such as utility bills, rent food, and even emergency needs. You can even get a small loan at an affordable rate from such associations. Also, consider government programs that offer emergency assistance to people.
- Make use of online lenders
Though lenders such as Cashfloat offer payday loans, you can still apply for better options from them. Most online lenders offer short term options to everyone, including borrowers that have low credit scores. They give a quick and better way of borrowing money, especially when your income is low. Such lenders can also save your time since the application is made online, and the approval of short term loans does not take much time.
- Borrow cash against your life insurance
If you have been paying life insurance for a while, you can borrow some funds and utilize the policy as collateral. Beware that this is only applicable when you have a permanent life insurance policy. The option is better than borrowing funds from a bank since you don’t have to go through a lengthy application process. A life insurance lending also comes with a low-interest rate, thus saving you some money in the long run. This is considered to be more affordable compared to personal loans or credit cards.
- Get your paycheck early
Rather than applying for a cash advance option, you should consider if there is a possibility of getting your paycheck a bit earlier than you usually do. A payroll advance is better since you get to collect the cash you have already worked for.
Final thoughts
If you have been planning on taking a payday loan, then you have the facts to determine if this is the right move. Though these options may seem appealing, they can cost you a lot of money and make you stressed. Look at the alternatives we have discussed above before making your final decision.
