Payday loans are a great option for those who need urgent money. That is because they don’t need any collateral or a credit score check. You can get the loan in just an hour of the time you applied for it.
However, it’s always important to pay attention to some features of this loan before applying for them. But wait, do you know what a payday loan is? If you do, well that’s great, you can comfortably skip the definition section but if you don’t, don’t worry, continue reading the article.
Payday Loan Definition
A payday loans service is a short-term, no-credit-check loan offered by online lenders. They are unsecured with minimal requirements included in the application.
To apply for the loan, visit the online lender’s website or download the cash advance app and fill out the application form. Before filling out the application form, first, carefully read the lender’s terms and conditions and see if you agree to them. If you do, continue with the application. If not, look for another payday loan lender.
The application form will include the amount you need to borrow. After filling out the application form, you’ll need to submit the requirements which can include:
- Proof of stable income
- Proof of active account
- National ID
Once the above forms are submitted, you’ll need to wait for a response on whether or not the loan has been approved. This can take a few minutes or an hour depending on the lender. If you filled out the form correctly and submitted all the documents required, chances are that you’ll be approved for the loan.
If the application is successful meaning you have been approved, the funds will be deposited into your bank account. You’ll then be notified of the repayment date which is mostly after a month.
What Should You Pay Attention to When Borrowing A Payday Loan?
1. The Requirements Needed During the Application
We have already mentioned the requirements needed during the loan application. When we were defining a payday loan, we described it as a no-credit-check loan. That means that no payday lender has the permission to check for your credit score.
Also, you are not supposed to pay any fee during the application. The only additional fees you’ll incur are the interest rates, prepayments, or late payments. This is important since the number of online scammers is growing and you may be conned into paying some amounts during the application.
2. Online Payday Lender’s Terms And Conditions
Every payday lender has his/her terms for lending out a loan. Some terms are common to all lenders while others are different. For instance, some payday loan lenders have prepayments fees when a borrower pays for the loan before the due date while others don’t have this term.
All the payday lenders charge late fees if you fail to pay the loan on time. These fees differ with different lenders hence it’s important to research for lower fees.
Also, the lender’s terms and policies have information on how they deal with default borrowers. Carefully read this part to be prepared in case of anything. But the key thing is that you should never miss payday payments to avoid the consequences.
3. The Interest Rates
Payday loans can be a great way to get urgent if only you know how to manage the loan. These loans are known to have the highest APRs of over 400%. Hence, if you borrow a $100 loan, you’ll be required to return an additional amount of between $15 and $30 which is so high. Here is a typical range of payday loan interest rates through different states.
Now imagine, that the $30 is for $100, what about when you borrow $1000, that will be about $300 from mathematical calculations. Imagine all this amount hanging in your debts.
That is why you need to be keen on the amount you are borrowing. The good thing is that your income level will determine the amount of loan you’ll be granted.
4. The Lenders’ Registration Info
Payday loan lenders are allowed to operate in 27 US states with some restrictions on lending being allowed in some other nine states. It’s important to find out which states these are. Also, the payday loan lenders are regulated by the Consumer Financial Protection Bureau (CFPB).
States like Michigan, Florida, Indiana, South Carolina, New Mexico, and Virginia states require that all the certified payday lenders conduct real-time verification of their borrowers’ eligibility to get permitted for the loan before starting the loan approval procedure.
The federal government requires that all payday lenders in the US be registered under the Ontario Ministry of Government and Consumer Services. You can go to their official website to check the list of licensed payday lenders and see if the lender you have in mind is on the list.
If a payday loan lender does not appear on the list, avoid them.
5. Know the Risks Involved
We have already mentioned the two examples of risks involved in payday loans. One is the high interest and the other is the possible cases of scams.
Another type of payday risk includes the possible inclusion of a negative mark in your credit score. A credit score is a major factor looked into by many loan lenders such as personal loans, mortgages, home equity, and auto loans.
A good credit score attracts a favorable loan with good terms while a bad credit score attracts a high-interest loan or no loan at all. Hence, it’s always important to aim for a score of 750 and above.
The payday loans have very high interests and so there is a high chance that you may fail to pay them back on time. This can lower your credit score drastically. According to CNBC, one study found that 76% of payday loan volume is due to loan churn – used to pay previous ones. This indicates that the loan can leave you in a debt cycle that is so difficult to get out of.
If you are not sure of how you’ll pay back the payday loan, you should avoid them and go for other alternatives.
Conclusion
Just like any other loan, a payday loan has its pros and cons that are worth paying attention to during the loan application. Always research about it before indulging in it.