If you need money in your bank account, you may want to apply for a payday loan. Payday loans offer quick cash to people with different financial backgrounds. So are payday loans fixed or variable? Keep reading to learn more about payday loans and your interest rate options.
What Should You Know About Payday Loans?
The Consumer Financial Protection Bureau defines a payday loan as a short-term, high-cost loan. The repayment length for a payday loan is two weeks. As the name suggests, borrowers use payday loans in between pay periods.
The qualification requirements are typically easy to meet for many people. Having a good credit score is not necessary. To apply for a payday loan, all you need is a reliable source of income. Payday loan lenders want to know if you can make monthly payments on time every month.
Payday loans are known as high-cost loans due to excessive interest rates. The interest rate of a loan is crucial because it determines how much money you pay to borrow money. The higher the interest rates, the higher your monthly payment will be. So if you want to save money with a payday loan, should you get fixed or variable rates?
Payday Loans: Fixed or Variable Rates?
When applying for financial relief, you must choose between fixed or variable rates. The option you choose will directly affect how much money you pay. Learn the difference between these two interest rate options for loans.
Payday Loans: Fixed Rates
Fixed-rate loans are the best option for borrowers who want to pay the same amount every month. The interest and principal payments do not change.
Fixed rates are beneficial if you’re on a budget plan since you can easily incorporate an additional monthly bill into your schedule. A fixed interest rate loan allows you to quickly calculate how much you will end up paying to borrow money.
Payday Loans: Variable Rates
Variable interest rates, or floating interest rates, fluctuate monthly, quarterly, or annually. The rate changes based on an index rate, such as the prime rate.
Variable rate loans can sometimes be beneficial. The interest rate can potentially dip low and save you money on interest fees. On the other hand, the interest rate can also increase and make it hard for you to afford monthly payments. These loans are a financial gamble, so carefully consider your financial situation before making a final lending decision.
Are Payday Loans Secured or Unsecured?
Payday loans typically have high approval rates because a good credit score is not required. But you may wonder, “Is a payday loan secured or unsecured debt?”
Payday loans do not require collateral since they are a form of unsecured debt. You do not need to risk using your personal property as collateral to get financial assistance. The only loan option that requires collateral is a pawn shop loan. If you prefer to use collateral, you may consider applying for a secured personal loan. However, getting approved for an unsecured personal loan is still possible despite low credit.
What Are the Cons of Working With Payday Lenders?
A payday lender can help you get quick money in your bank account, but there are cons to consider. Due to predatory lending practices, the government has banned payday loans in twelve states.
Learn more about the cons of payday lenders before applying for a fixed or variable rate payday loan.
Low Loan Amounts
If you need a lot of money, a payday loan is not an ideal option for you. For example, if you are looking to pay for expensive car repair a payday loan is not an option. The average payday loan debt amount is $500, which may not be enough money to cover costly car repairs like the cost of a new suspension or catalytic converter.
High Interest Rates
Many payday lenders stress the speed of payday loans, but the interest rates can be predatory. The average interest rate for a payday loan is 391%, although rates can go as high as 600%! The Consumer Financial Protection Bureau (CFPB) estimates that 80% of borrowers cannot repay payday loans within the two-week timeframe.
If you fail to repay a payday loan before the due date, your loan will roll over. You will incur a rollover fee, and the lender will extend the repayment length. The average penalty fee for a payday loan is $15 per $100 borrowed. If you fail to pay back a $400 payday loan, you will have to pay a $60 rollover fee.
Borrowing money through a payday loan can easily lead you into a debt spiral. If you need cash today but struggle with bad credit, know that there are better alternative options!
Payday Loan Alternative Options
If you need money quickly, consider applying for a bank loan or an unsecured personal loan. These lenders typically allow you to choose between a fixed or variable interest rate.
Getting a loan from a bank can help you save money on interest fees. When you have to pay less for borrowing money, you can pay off debt faster! Keep in mind that a variable interest rate loan from the bank is risky because rates are based on the market and not your credit report.
If you have a decent credit score, you may be able to qualify for a loan with affordable repayment terms. However, individuals with low credit may have difficulty finding a lender to work with. Remember that the application process can be lengthy, and you may not get your desired loan amount.
Personal loans offer eligible borrowers one lump sum payment to spend on any expense. You can even use personal loans as debt consolidation loans. Loan amounts can range from a few hundred dollars to a few thousand.
Eligibility for a personal loan is flexible. Most lenders consider the primary qualification factor to be income. If you can show proof of your ability to make payments, you may qualify for a fast personal loan.
How Do Payday Loans Work?