Payday Loans: How They Work

Payday loans have had a buzz over the years with some people against them while others were supporting them. One thing is for sure; if you need some quick cash to help you in an emergency, payday loans may be the faster option. You can access one as quick as one day.

Payday loans are short-term loans, and you are expected to pay on your next payday. Numerous loans have the provision of applying online. However, payday loans always work with the underlying assumption that you, as the borrower, are desperate for money.

Here are some factors to consider about payday loans.

High-Interest Rates

Payday loans have high-interest rates compared to other lending channels. Some companies may have a fixed fee you pay on a monthly basis which could cost you a fortune. Others have high-interest rates such that if you don’t repay the loan quickly, you end up paying large sums of money compared to the interest paid when using a credit card in a year. Credit cards are an excellent alternative compared to payday loans as they are flexible. Find out more about https://aaacreditguide.com/synchrony-bank-credit-cards/.

Your Credit Rating Is at Risk

Just like most loans, payday loans have a quicker way of making your credit rating drop. They are strict on payments. If you miss out on payment, they end up destroying your credit rating. Also, if in future you want to apply for homeowner loan or a loan for your startup, it may be hard to get approval. This is because, the lender may make an inquiry, where they will access your credit report and see you had borrowed a payday loan. This will be a red flag as they may see you as a risk.

Penalty Fees

There may be an agreement between you and the lender to set an automatic payment through the bank. What happens is, if the lender goes to withdraw funds for the loan payment and it results in an overdraft, they will penalize you. On the other hand, the bank will charge you for a failed attempt which may lead to you paying hefty amounts on a small loan you took out of necessity.

Repeated Short Term Lending

What happens if you can’t pay the loan when the time comes? Some of these lenders have the provision of allowing you to borrow out another loan but for additional fees. This is a form of refinancing. However, this will mean that you have a prolonged repayment period which is expensive as you will pay higher interest. This may make you end up paying a loan for a very long time and could make you fall into a pitfall of debt that could be hard to get out of.

There is always an alternative to payday loans. Below are some pointers that can help your financial journey.

  1. The quickest form of avoiding payday loans is having savings account for emergency situations. This is usually challenging as not everybody has the discipline of tucking away some money. You can opt to work extra hours to help you earn extra cash.
  2. You can look up peer to peer lending organizations that will have friendlier rates.
  3. Work on your credit rating, and you can easily borrow from lenders such as banks whose terms will not hurt your pockets.

Payday loans can turn out to be a terrible move. Only apply for such loans through trusted firms as scammers are all over. You may end up giving out vital information to people who don’t intend to lend you the money. Avoid those that need upfront fees as you may get into something that may be hard to get yourself out.

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