Payday loans are a common type of short-term loan for individuals with poor credit in need of some quick emergency funding. They have notoriously high-interest rates, which make them costly.
The name stems from the idea that they are a loan you take out when you need to cover bills before your next payday. However, the short-term nature of payday loans paired with the high-interest rates can make them incredibly difficult to pay off before your next payday, resulting in extensive loan fees.
The last thing you want to do is inadvertently find yourself in a never-ending debt trap. Understanding the mechanics of payday loans can be exceedingly helpful in determining if they are the right move for you.
We will explain the basics about whether a payday loan is variable or fixed rate and what other solutions might be available to you when you are in a financial pinch.
The Difference Between Fixed and Variable Interest
The difference between a fixed or variable interest rate is whether the rate of interest on your loan changes or stays the same as the loan progresses.
Fixed Interest Rates
Fixed-rate loans have a static interest rate that does not change over the life of the loan. The benefit of a fixed-rate loan is that you can easily calculate how much you are required to pay in interest at the start of the loan.
You are less likely to see your monthly payments change significantly from month to month with fixed-rate loans, making them easier to budget. Common types of fixed-rate loans include auto loans and traditional mortgages.
Variable Interest Rates
Variable-rate loans have an interest rate that changes as the index rate changes. An indexed rate is an interest rate connected to a specific benchmark that will move up and down based on current market conditions.
Variable interest rate loans can become more costly or less costly month to month through the life of the loan, depending on market conditions. The longer the terms of variable rate loans, the more risk you take of a higher interest rate.
What Are Payday Loans?
A payday loan is only intended to help you cover expenses until you get your upcoming paycheck. They are short-term in nature and paid off in full in one lump sum. Payday loans cost borrowers a significant amount in interest, especially if you cannot repay the entire loan amount when it is due.
Payday loans work by using your income to approve you, and the payday lender usually requires you to show them a pay stub in the application process. If borrowers have an adequate income for the loan amounts they are applying for, it is possible for them to qualify despite poor credit scores.
This type of unsecured personal loan is so enticing because they are fast. Payday lenders offer a direct deposit straight into the borrower’s bank account more quickly than other financing options out there. A payday loan is also referred to as a cash advance loan or check advance loan.
Payday loans tend to be a loan type that you want to avoid unless they are necessary because of the extremely high-interest rates.
Are Payday Loans Variable or Fixed Rate?
So, are payday loans fixed or variable rate? Payday loans are intended to be repaid in one lump sum payment when you get your next paycheck. Because of this, payday loans usually have a fixed rate. Many payday lenders generally don’t even talk about interest charges in terms of a rate but rather as a fixed flat fee since they are intended to be paid off in one payment.
Fast Facts About Payday Loans
Suppose you are considering a payday loan to cover your utility bills or some other kind of expense. In that case, we have a few further facts about payday loans for you to review before deciding how you would like to proceed.
Payday Loans Are Unsecured
A majority of payday loans are unsecured. Unsecured debt does not require borrowers to provide the lender with any kind of collateral to secure the loan. The average interest rate for unsecured debt is higher because of the increased risk without collateral, especially when it comes to subprime.
To ensure borrowers repay the payday loan debt, payday lenders may ask for authorization to electronically withdraw money from the borrower’s bank account or credit union account at the time the loan is due. As another option, a payday lender might ask you to write a post-dated check to be cashed during the repayment period.
You Can Get a Payday Loan Without a Bank Account
Payday lenders do not always require that you have a bank account to qualify for a payday loan. However, it is important to note that the payday lenders that don’t require borrowers to have a bank account most often charge significantly higher interest rates.
This type of payday loan, while more convenient for some people, might be too difficult to repay on time and might not be worth what it will cost you. It’s best to avoid them unless you are sure you can afford the loan rates and finance charges.
Payday Loans Are Heavily Regulated
The average payday loan has an annual percentage rate (APR) of nearly 400%, with some payday loans fixed at a 780% APR. Many payday lenders have been rightfully accused of predatory lending practices because of these high rates with unreasonable repayment schedules.
Payday loans are regulated state by state, with 16 states outlawing them all together to protect borrowers. A majority of states have interest rate caps, but payday lending often falls under certain exceptions which allow lenders to charge higher loan rates.
The loan amount on a payday loan is usually anywhere between $100 and $1,000. Lenders are also required by federal law to disclose any finance charges and if they have an origination fee.
Alternative Short-term Solutions
Even when circumstances seem as dire as they can be, there might still be options that you hadn’t previously considered.
Turn to a Friend or Family Member
We all have people in our lives who would be willing to help us out during a tough time, even if we aren’t aware of it. It is often not advisable to mix money and family or money and friendship, but there are always exceptions. Consider asking someone close to you, a family member or close friend, to borrow money temporarily. You might be surprised at their willingness to help.
Asking to borrow money from someone in your life might be difficult, but it could save you a significant amount of money on interest and prevent your credit rating from being impacted by a loan you can’t afford.
Credit Card Cash Advance
Even though a credit card cash advance can have a costly interest rate as well, it might be a better option for quick cash, depending on your credit card company. A cash advance on a credit card works somewhat similarly to an online payday loan in that you may still need to repay the amount borrowed in one lump sum. But they might pose less of a risk to you since you already have a financial history with the company.
Are there perhaps some online subscriptions or streaming services you’ve completely forgotten you were paying monthly? Check your bank account statement just in case. Cutting unnecessary expenses could suddenly make those bills you thought you needed a payday loan for affordable.
Bring in Supplemental Income
Of course, getting a side hustle won’t bring you the money you need to cover some immediate bills as quickly as a payday loan, but there are faster ways to bring in some extra income. You could sell some lightly used clothes that you don’t wear anymore online.
Some online marketplaces make it incredibly easy to make a quick buck. You can do the same with the furniture just sitting and gathering dust in storage. You’d be surprised how quickly you can scrounge a couple of hundred dollars from unused valuables.
Personal Installment Loans
Personal loans from credit unions or local banks could get you funding with more generous repayment terms. An installment loan allows you to repay the balance in multiple payments rather than one.
If you are concerned that a bad credit report will make it difficult for you to get an installment loan, do some shopping around first, as there are usually exceptions. There are personal loans for people with bad credit that can be found online, which might offer a deal far less costly than payday loans.
Always do your research so that you can feel confident that you are making the best move for your overall financial well-being.
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