How do payday loans work?
It’s a smart idea to get a loan quickly and not have to pay it off until your next payday.
How do payday loans work? Are they the beginning of a vicious cycle of high-interest payments and expensive fees?
When you are in financial trouble, it can be tempting to search for quick solutions. Although online payday loans may seem straightforward, they can often have additional costs that could make your budget more difficult than you expected.
The Consumer Financial Protection Bureau (CFPB) reports that nearly 25% of payday loan applicants default on loans, and more than 80% need to borrow again within 14 days.
What is a Payday Loan?
According to the FDIC, approximately 24 million adults are considered underbanked, 11% of the total population. They are dependent on financial services such as payday lenders.
You may have noticed storefronts advertising payday loans or quick cash in your locality.
Payday loans are short-term loans that last for up to two weeks. You can either write a check or provide a debit number to receive the cash the same day.
The lender will cash the check when the due date has passed to complete the loan. If you have the cash, you can arrange to pay the loan back at the loan office.
Payday loans may end up costing more than you think. These loans are designed for immediate cash needs and cannot wait to be paid back.
Payday lenders charge higher interest rates and fees than traditional banks loans.
What happens if I cannot pay my payday loan on time?
According to the CFPB, the average payday loan is $1,000. With a shocking interest rate of 260%, it can quickly add up.
You can request to renew your loan if you cannot pay the loan on the due date. This will be treated by the lender as a payday loan, and you will be charged additional fees.
Depending on the terms, you may be turned over to a collection agency or debt collector, and these agencies might report you to credit reporting companies.
Before you apply for a payday loan, consider this:
- Let’s suppose you have $200 to pay for a car, medical bill, or any other expense that can’t wait. A $30 fee is charged by a payday lender for each $200 borrowed.
- Payday lenders will send you a post-dated cheque and take the money.
- You can’t repay the $200 loan if you don't have enough money by the due date. Although the lender will allow you to extend the loan, the lender will charge you a $30 renewal fee and a $30 late fee for the $200 loan.
- What if your next payday is not as large as you expected? For $30 more plus a $30 late fee, you may have to extend the loan once again. You’ve now paid $150 alone for fees when you needed $200.
Are there better options than a payday advance?
You should shop around for the best rates and terms if you need money to pay a bill or purchase. Payday lenders can charge you high interest and fees, as you have seen.
Even if your bank doesn’t believe you are eligible, you can still check to see if they offer a loan. Personal loan.
Banks offer affordable loans that let you borrow the money you need at much lower interest rates. A loan may be available to you if you are eligible. Line of Credit.
It is possible to be tempted by the temptation to max out your checking account to pay for a purchase.
You should be aware that the non-sufficient fund’s fees (NSF), which can quickly add up if you have multiple transactions, can quickly add up. To cover accidental overdrafts, you can link your savings account with your checking.
It will be easier to manage tight budget days if you have good financial habits. You can start by paying yourself first. Even $10 per week can add up to a financial cushion and help you save money.
Set up an automatic transfer to help you build your savings and avoid forgetting to add money to your emergency fund. A portion of your direct deposit can be automatically transferred to a savings account.
PaydayChampion makes it easy to automate your savings with our Round up to Save Program.
We automatically transfer any difference to your savings account when you make purchases with your debit card. We match up to $250 of your savings at the end.
My Name is Jay has and I have a passion for financial writing. I am the chief writer on this blog. I do my best to verify all the information but if there is anything amiss please let me know and I will do my best to correct it.