What if you could get the money that you need without even leaving the house?
When you need money and you need it quickly, payday loans may be the best option. However, many people hesitate because they have a simple question: “how do payday loans work?”
If you’re wondering how these loans work and whether they are right for you or not, keep reading to discover the answer!
What Are Payday Loans?
We’ve put together a comprehensive guide to how payday loans work. First, though, it’s important to define exactly what payday loans actually are.
The loan gets its name from the fact that in most cases, all you need is proof of income to get the loan you need. And the loan typically must be paid back within a month’s time.
In short, you pay the loan back by the time your next paycheck rolls around. Because of this, many people use payday loans to supplement their income when finances are tight.
How Do Payday Loans Work?
Chances are that you have had a loan or two from your bank or other institutions. For many people, it can be difficult to understand how payday loans differ from these more traditional loan types.
Most traditional loans require a credit check upfront. However, payday loans do not require a credit check (more on this in a moment). All you really need is proof of regular income.
Payday Loans and Your Credit
Applying for payday loans does not impact your credit in any way. Depending on your situation, this can be a good thing or a bad thing.
For example, many people with poor credit rely on payday loans when their finances have gotten tight. And these loans remain a great solution for when someone needs a quick bit of extra cash before they get paid again.
However, some people take out more of a payday loan than they can easily pay back. The costs of the loan add up and may impact your ability to pay other bills.
In this way, the loan that was meant to not hurt your credit may put you in a situation where various unpaid bills hurt your credit.
How Can I Apply?
Chances are there are multiple businesses near you where you can apply for a payday loan. You can also now apply online: this page has more details on how to get started.
What kind of paperwork will you need in order to get started? While the specifics may vary from lender to lender, there are certain details that are nearly universal.
For instance, many lenders will want to see pay stubs or some other form of current employment. And they will typically need a state-issued form of identification such as a driver’s license.
Lenders you visit in-person may require you to complete a future dated check for them. Such a check includes the amount of money you are borrowing as well as an added financing fee.
How Does Payday Loan Interest Work?
Like we said before, payday loans are very different from traditional loans. This leaves many people asking exactly how payday loans work when it comes to interest.
Strictly speaking, payday loan interest doesn’t exist. Instead, the lender relies on what they call “financing fees.”
The lender will set a certain amount of money you must pay back for every $100 (or another fixed amount) that you borrow. And as long as you pay the original amount back plus the financing fee on time, that’s the last you’ll worry about it.
People get in trouble when they can’t pay everything back on time. In that case, the loan typically rolls over a new financing fee is added. In most cases, the financing fee is a higher percentage than a standard interest rate, so it’s worth it to pay things off on time whenever you borrow.
What Are the Benefits of Payday Loans?
You’ve got a lot more info about how payday loans work. However, we still need to answer the question of whether payday loans are right for you or not.
Generally speaking, there are two primary benefits of payday loans. They are easy to get and they get you your money very quickly.
As we said before, no credit check is required, and simply having a job qualifies you for a payday loan. That is a major benefit to those who have bad credit or very young credit.
Similarly, these loans process very quickly. It’s not uncommon to get your money on the same day you apply.
Needless to say, that is a really big deal for those who need money quickly.
What Are the Drawbacks of Payday Loans?
We’ve revealed the chief benefits of payday loans. Therefore, we need to explore what some of the specific drawbacks of these loans are.
First, they may create a debt trap for certain borrowers. When people borrow money they cannot pay back (easy to do when no credit check is involved), it creates a cycle that is hard to break out of.
The other main drawback is that most loans and even credit cards offer a better interest rate than payday loans. If it’s possible for you to obtain more traditional loans or credit, that is usually a better choice than payday loans.
As a bonus, these more traditional options give you better financial control.
What Are My Alternatives?
Speaking of alternatives, many people curious about payday loans don’t fully understand their alternatives.
It’s possible to apply for loans and/or lines of credit from your local bank. And if you’re a member of a credit union, your odds of getting approved are even better.
You can also rely on credit cards or ask your employer for an advance. This may be easier to do than applying for a payday loan.
For borrowers who don’t have these as options, though, the payday loan remains a great choice.
The Bottom Line
Now you have an answer to “how do payday loans work.” But do you know how to escape the need for these loans?
At Inspire 52, we have the kind of news you can use every day. For example, check out this great guide for achieving promotions and raises by advancing your career.
