When you are strapped for cash with bills to cover, you may be considering what options you have to borrow money quickly. You might be considering a common short-term lending option for quick cash called a payday loan. Payday loans are a type of personal loan that is notorious for having a high annual percentage rate, making them expensive for most borrowers.
You might wonder if a payday loan is the best avenue for your need for emergency cash to cover expenses. When it comes to your finances, it is always wise to make decisions that are fully informed by various perspectives. We have gathered together some of the most vital information you need to know about payday loan debt before moving forward with one.
Since payday loans tend to be known for predatory lending, we will equip you with red flags to look out for and some alternatives you can turn to for extra cash, including other personal loans that might fit your needs better than a payday loan.
What Is a Payday Loan?
A payday loan is a short-term loan that is aptly named as they are meant to be repaid in one lump sum payment at your next payday. Payday loans are incredibly high-interest personal loans that are only meant to hold you over on expenses until you get paid next.
Easy payday loans are still popular despite the high-interest rates because they provide funding very quickly and have lower qualification requirements. Lenders generally direct deposit the loan amount into the borrower’s bank account after approval since it is meant to act as a cash advance on your paycheck.
Borrowers often turn to payday loans when they don’t have a credit rating or credit history good enough to qualify for another kind of personal loan. Rather than relying heavily on a credit check, many payday lenders use proof of income like pay stubs to determine approval and the loan amount.
Are Payday Loans a Good Idea?
Most financial experts would not recommend a payday loan except as a last resort. Paying back the loan amount on top of the loan rates and finance charges in one payment by your next paycheck could put a strain on your finances, leaving you worse off than you started. It’s essential to know precisely what you are getting into before obtaining a payday loan for yourself.
The Difference Between Fixed and Variable-rate Loans
Before getting into how payday loans work, let’s look at the difference between variable interest rates and fixed interest rates. Whether your personal loan has a fixed or variable interest rate will significantly impact what your monthly payment looks like and how much the loan will cost you overall.
Fixed-rate loans have their interest rate locked in from the start of the loan. The interest rate does not change from month to month, so you can easily calculate the total amount you’ll be required to pay in interest.
With a fixed interest loan, your monthly payment will not vary widely, making them easier to budget for and your other expenses. Loans with fixed interest rates commonly include auto loans, traditional mortgages, and different kinds of installment loans.
On the other hand, variable loans have an interest rate that changes over the life of the loan as the index rate changes. An indexed interest rate is tied to a particular benchmark that will go up and down depending on the current market conditions during the repayment period of your loan.
Variable loans can be hard to predict because they can sometimes save you money and sometimes cost you money. Your monthly payments can go up or down throughout the repayment term, depending on how the interest rate changes with the state of the market.
Are Payday Loans Fixed or Variable?
The question we come back to is: are payday loans fixed or variable-rate personal loans? Payday loans can be fixed-rate loans. As a payday loan is meant to be paid back in one single payment rather than multiple payments, payday lenders tend to charge the borrower one fixed flat fee as interest.
A payday lender will usually tell borrowers the total amount they will be paying for interest along with the loan fees. Both of which borrowers repay along with the original loan amount in one lump sum payment online installment loans.
What You Need To Know About Payday Loans
If you are thinking about a payday loan to cover your bills before your next paycheck, we can highlight a few more important facts that you ought to know before deciding if this type of personal loan is the best solution for you.
Payday Loans Differ by State
The payday lending industry is limited by state as some states have more regulations on payday lenders than others, while some outlaw them altogether. The average payday loan has an annual percentage rate of 400%. This average interest rate is far above most states’ interest rate caps. However, payday lenders are able to work around these caps on loan rates because the nature of their lending falls under specific exemptions in the law.
Some payday loans have an interest rate fixed at over 700%, which is why payday lenders have been accused of predatory lending practices. The high interest can make paying the loan back on time incredibly difficult. Since the laws on payday loans differ from state to state, you will need to see what is available in location before making a decision.
Payday Loans Aren’t Secured
A payday loan is an unsecured personal loan, meaning that it does not use collateral to secure the cash you borrow. This sets them apart from auto title loans, a popular kind of secured loan available to borrowers with bad credit. The lack of collateral on an unsecured loan means higher loan rates to offset the risk taken by the lender.
Lenders might attempt to make a payday loan secured in other ways besides collateral by requesting an authorization from you to electronically withdraw money from your checking account if you do not repay the loan by the due date. Alternatively, they might ask you to write a post-dated check for when the payday loan installment is due so they can ensure repayment.
Payday Lenders Don’t Always Require a Bank Account
Payday loans are one of the rare personal loans that don’t always require a bank account for approval. You can use a prepaid card account to receive your money instead, among other options. Being able to qualify for a payday loan without a bank account and a bad credit report are the biggest reasons why this kind of unsecured debt is still so popular despite the high costs.
However, it is crucial that you know that payday lenders who don’t require you to have a bank account usually charge even higher interest rates than those that do. Even though it might seem strikingly convenient, you ought to be wary of lenders making false promises they can’t back up.
Alternative Options for Quick Funding
If you feel that a payday loan is the only solution to your funding needs, we will suggest a few other options you may not have considered yet. It’s always a good idea to review all the avenues open to you before moving forward with a significant financial decision like a loan.
Change Your Budget
We know it can be highly frustrating to be told repeatedly to rearrange your budget. After all, it is not always that simple. Sometimes you just don’t have the resources. But occasionally, it is precisely the thing you need to hear.
You might be signed up for subscriptions, memberships, or streaming services that you can live without for a while. Some of them might even refund you if you cancel right after you were charged. You can always sign up again in a few months when you’ve gotten back on your feet again.
Ask For Your Paycheck Early
If you’ve been with your job for a while and have a good working relationship with your boss or supervisor, you might be able to ask for an advance on your paycheck. This is not something you want to do all of the time, but everyone has a tough time at one point or another, and your company might have systems in place to pay employees early if necessary.
Credit Card Cash Advance
Getting a cash advance on a credit card that you already have could be an excellent alternative to a payday loan. A credit card cash advance will still have high-interest rates, and you will still need to pay it off in one large payment. But it might be less of a risk since you already have an established relationship with the credit card company.
Paying off a cash advance on your credit card could also improve your credit history as it will be reported to the credit bureaus. Not all payday lenders report loans to credit bureaus, so there is a chance they won’t show up on your credit report unless they are sent into collections.
Borrow Money From Someone You Trust
When in need, we should be able to turn to those we trust. If you need to borrow some money, consider asking a close friend or family member to help you out. It is not always advisable to mix money with friends and family, but if you are in a tight spot, this might be the time to ask for the help you need. You may be surprised how willing the people who love you are to help out.
Monthly Installment Loans
Don’t make the mistake of assuming you won’t qualify for unsecured installment loans just because of bad credit. Installment loans are far easier to pay back than payday loans as they are repaid in multiple payments, more like an auto loan. There are bad credit personal loans that can be found online if you know where to look.
Ideally, you will want more time to pay off personal loans so that you can get the money you need to cover your expenses without having an unaffordable repayment schedule.
Installment Loans vs. Payday Loans: Know Before You Owe
Are Payday Loans Fixed or Variable? (What You Need to Know)
Is a Payday Loan Variable or Fixed? – MoneyZap
How Personal Loans Differ From Payday Loans | MyBankTracker