Are you considering a payday loan? Payday loans are a fast way to get emergency money but they do come with fees. The fees are not extremely high if you look at it from a dollar amount. For example, a $100 loan might have a $14 fee attached to it. This means that you would need to pay back $114. Not too bad unless you look at it from an interest rate point of view. If the loan is due to be paid back in 14 days, it would have an effective interest rate of 365%. Quite high in the lending world.
So why the high interest rates? Simple. These are high risk loans for lenders. They have little time to review an applicant and often do not even pull a standard credit report. Risk equals high interest. Know that the loans are high interest going in and be sure to review all of the terms of your loan before you accept it. Then you can decide if a cash advance or payday loan is worth the interest paid. Want to see what the interest would be on your loan? Get a no obligation quote now and see for yourself. It never hurts to look.
How Do Payday Loans Work?
These are very simple loans designed to get consumers by until their next pay period. These are not designed to provide long term financial help and should only be used for emergencies. In most cases, the borrower gives the lender permission to deposit money into their account and then automatically withdraw the agreed upon payment on the loan due date. Most loans are due to be repaid fully in 14 to 30 days although some lenders may allow for longer terms with multiple payments. Annual percentage rates usually start at around 350% and go up depending on your lender, the length of the loan and the state that you live in. Effective interest rates are high because of the short term of the loan. For example, the fee on a $100 loan might only be $15 but if it is due to be repaid in 14 days, the effective APR is 391%.
What’s Required To Get A Payday Loan?
The requirements are slim for these loans. This is why they are so easy and fast to get. For some people, they might be the only source of emergency money available. To qualify, you generally only need a checking account, a verifiable source of income and must be over the age of 18.
There are several benefits to payday loans. The primary one is that they are easily qualified for. Even those who have been turned down for other credit can typically be approved. Many lenders do not even check traditional credit reports. Another benefit is that these loans fund very quickly. In most cases, the money is wired directly into your account by the next business day.
Countering these positives are a few negatives that you must understand. For starters, they must be repaid very quickly, 14 to 30 days in most cases. Lenders typically do not consider your ability to repay the loan so you must do so. If you can not repay the loan at the end of the term, your only alternative may be to extend the loan which will cost you more fees. This has led many people to get stuck in a payday loan cycle, so be careful. Another negative is the high effective APR’s. Because of the short loan term the interest rates are high. A $100 loan might have a $15 fee but if you repay it in two weeks, the effective APR is close to 400%.
Should You Take Out A Payday Loan?
This is something that you should consider very seriously. You have to weigh in a lot of factors. Ask yourself if you have any other sources of money with lower interest, if you really need the money and if you can really pay the loan back at the end of the term. In some cases, it might be better to pay a bill late rather than take out a high interest payday loan. Look at the potential late fees that you face and compare them to the fees charged for the loan.
For some, the fees and interest charged may be worth it. They might be less than late fees or the money might be needed for a surprise expense that can not be put off. For others, there may be alternatives. For example, many lenders will allow you to skip payments if you are in good standing. Some credit card companies might allow you to pay an interest only payment. You might also be able to borrow from friends or family. Still another option might be to sell some unneeded property.
After Taking Out A Payday Loan
Your first and foremost priority is paying the loan back on time to avoid additional fees. Cut out unnecessary expenses, stop going out to eat, bring your lunch to work, walk instead of drive to save gas, whatever it takes to make sure that the loan gets paid back.
After you have repaid the loan, your next goal should be to establish a savings account for emergency expenses. Everyone should be able to dave a few dollars every month for emergencies. If you can not, you need to evaluate what you are spending your money on because you are probably living outside of your means. Establish a budget and stick to it. Having even a few hundred dollars in a savings account could help you avoid high interest payday loans in the future.
How Do You Calculate Your Interest Rate?
To calculate your interest rate, take the fee that you are paying and divide it by the amount that you are borrowing from the lender. Then, multiply that by 365, the number of days in a year and divide that by the length of the loan in days. Finally multiply that by 100.
So, for example, if you have a $100 loan with fees of $15 and you are paying it back in 14 days, this is what you get. 15 divided by 100 = .15
.15 multiplied by 365 = 54.75
54.75 divided by 14 = 3.91
3.91 multiplied by 100 = 391 or 391% interest.
What Defines A Payday Loan?
A payday loan or cash advance has many unique characteristics. Here are the main ones.
- They are for small loan amounts.
Most loans are for just a few hundred dollars and almost never over $1000. The dollar amount of the loan is limited by the stat in which you live. Every state that allows payday loans sets their own limit on what can be borrowed.
- Loans are repaid all at once. Most of these loans are to be repaid in one lump sum in just a few weeks. This is where the payday comes from in the name as they are meant to be repaid when you get paid again.
- To repay the loan, the borrower will give the lender a post dated check for the amount due plus fees or they will authorize the lender to withdraw the money directly from their checking account.
- Most loans will be directly deposited into your checking account.
Potential Payday Loan Issues
The biggest issue with payday loans is when a borrower can not pay back the loan at the end of the term. When that happens, most will roll over the loan. This adds fees and increases the interest that you pay on the loan. Many borrowers find themselves repeatedly rolling over the loan, getting stuck in a cycle that can be difficult to get out of. They keep paying new fees every few weeks for the same amount of money.
To avoid getting stuck in a payday loan cycle, the easiest solution is to never take out a payday loan. Consider your alternatives before you proceed. If there is anyone that can loan you money, pursue that angle. If your employer will advance you money on your paycheck, take them up on it. Do you have something not needed that you can sell? Sell it. If nothing else, take whatever sources of money that you can and use it to reduce the amount of the loan that you need to take out.
If you do fid yourself in a payday loan cycle you need to get out of it as soon as possible. Check to see if your state laws provide you with an easy out. Some states require a lender to give you a no fee payment plan. If that is not an option for you, at least try to pay some of the principal back each time you roll the loan over. This will allow you to at least slowly pay off the loan.