It seems that a lot of people are in a tight bind these days. Many seem to be living from paycheck to paycheck and hoping that nothing really happens that would require a substantial amount of money. Meanwhile, as we're driving down the street we start to notice signs that offer instant payday loans everywhere we look. The promises are enticing: no credit check, fast money, and pay when you get your money. Nothing could be easier, right? But it pays to understand what is a payday loan and how it works before you decide to sign on the dotted line.
What Is a Payday Loan?
Payday loans are probably one of the most expensive types of loans you can get. Financial advisers caution that while many people may need them, they should be used only when absolutely necessary and with extreme caution. And the sooner you pay the money back, the better it will be for you.
Instant payday loans are usually offered at a fixed dollar fee, which is basically a finance charge set at a percentage rate of the borrowed amount. Because the term of the loan is such a short period of time the charges can be unusually high. To ensure repayment of the loan, the borrower must either write a postdated check or set up an automatic withdrawal from his or her checking account.
The Way It Works
The process of getting these types of loans is pretty simple. As an example, your rent may be due but your payday does not come for another week. So, you decide to borrow the amount you need for your rent from a payday loan. You'll fill out your paperwork, show verification of employment, and proof of identification. The lender will request from you a debit authorization or a postdated check for the amount of the loan plus a sizable service fee to be paid up to 14 days later. When your allotted time period is up, the lender will then debit your account or deposit the check for repayment of the loan. If your account is negative when the period is up you're facing additional fees or legal action.
Why Use Instant Payday Loans?
For the most part, if you have a steady income and a checking account you can qualify for an instant payday loan. However, the average person who uses these services are those with either a poor credit rating or without access to a credit card.
There are certain benefits to using these instant loans; they make it very easy to borrow money in an emergency when you don't have alternative options. However, there are some drawbacks to taking out these loans as well. If you can't repay the loan, you are generally faced with exorbitant fee that may thrust you into a cycle that you won't be able to break. Their fees are already pretty high, so exercise extreme caution. In many cases the fees could come up to 400% of the loan value. When you compare that to a standard credit card rate of around 12% you can see how dangerous they can be if you're not careful.