Payday Loans- The Lending Process, Payments, Interest and Credit Scores
It is common that when people budget their finances, they develop a tendency to ignore unforeseen expenses that may be brought about by various emergencies which may cause a big dent on their budget. These emergencies may be in the form of medical bills, an unexpected death in the family, unplanned travels and outrageous home bills and taxes. These people in dire need of cash have few options to consider. Top of the list is taking out a loan and secondly borrowing money from friends and relatives. Most people prefer the former.
A loan generally refers to debt given by an individual or organization to another individual or organization at an agreed interest rate and repayment period that is recorded in a promissory note. Loans can be classified as either long term or short term. Short-term loans take a very short time to get processed compared to long-term loans. To meet urgent expenses that demand immediate attention, most people opt for a loan that does not require a lot of processing but is rather immediate in releasing the loan.
To meet these immediate needs, most borrowers take out payday loans. A payday loan is also referred to as cash advance loan. It is a short-term unsecured loan extended to a borrower who is usually employed. The lender expects to be repaid by the borrower’s next payday. Due to the ability in payday loans being able to meet the borrower’s urgent needs, they have gained popularity among many people who are going through a financial crisis. As a borrower, it is imperative to be well informed about the type of loan you are about to take out. You should review the aspects of the loan thoroughly and determine whether it is suitable for your financial circumstance. The following are some features of payday loans that you should carefully consider when applying for this loan.
Payday loans are generally unsecured in nature. An unsecured loan means that the borrower does not have to put up property as collateral to get the loan. Instead the lender asks for other important documentation from the borrower. Due to this nature, lenders of payday loans face great risk of losing money in the event that the borrower default in repayments.
High interest rates
Due to their unsecured nature, payday loan lenders charge very high interest rates for their loans. These outrageous rates are linked to the risk the lender faces in the event that the borrower defaults in repayment. The annual percentage rate for most payday loans is supposed to be 36%-40%. However, payday loans have sky-high interest rates which may hit up to 300% APR. Compared to other forms of borrowing, payday loans have exorbitantly high interest rates.
No credit checks
Many borrowers are often haunted by a dark credit past. Previous debts may have hurt their credit score due to either delay or default in making repayments. A poor or low credit score reduces borrowing capacity. It becomes difficult for the lender to extend funds to this kind of borrowers as they may default in making repayments. A low credit score may subsequently increase interest rate of a loan. Most lenders perform credit checks on their potential customers to ascertain that they are lending to punctual lenders. Payday loans are a shelter to many who have been rejected due to their low credit scores. This is because lenders of payday loans do not perform credit checks as eligibility in securing a payday loan.
Online payday loans
The availability and accessibility of the internet has led to various innovations in the borrowing industry. Now, payday loans can be taken out on online platforms. This platform acts as a bridge between borrowers and payday loan lenders. Online payday loans enable borrowers to enjoy instant payday loans within a short span of time. Borrowers are expected to complete loan application online. upon loan approval, the funds are deposited into the borrower’s bank account. Subsequently, on the borrower’s next payday, the outstanding debt is withdrawn by the lender from the borrower’s account electronically.
What payday lenders expect from borrowers
Like any other form of borrowing, you are expected to meet the required criteria to qualify for a loan. Most lenders expect you to put up property as security to qualify for a loan. In payday loans, collateral is not of great concern. This makes applying for a payday loan quite easy as you do not have to worry about item loss in the event that you default in repayment. To qualify for a payday loan, lenders require you to be at least 18 years. The borrower is also expected to provide some verification of employment and should have a recurring source of income. The borrower may provide proof of employment by providing recent paystubs and bank statements.
Payday loans may hurt your credit score
Payday loans come with extremely high-interest rates which makes the repayment amount a bigger sum than the actual amount borrowed. This places a heavy financial burden on the borrower in the long run. Due to their expensive nature, payday loans may force a borrower to sink further into debt as he may take out another payday loan to settle outstanding debts. It also becomes difficult for the borrower to make payments promptly which may adversely affect his credit score.
Like in any other businesses, the loan industry is filled with both genuine and rogue lending companies. Borrowers are expected to be more thorough on their review before they pick the company to take them through the lending process. Most payday loans operate online. When visiting their website, be thorough, scrutinize their terms and conditions carefully and see if the lender is licensed. Lenders who, for instance, do not indicate the APR they charge on the loans should also be avoided as it may be too late should you only realize that the APR hits 300% only after you signed the loan contract with them.
This refers to an agreement signed by the borrower which allows the lender to take what you owe him directly from your account through your debit card on the repayment date. This generally implies that the lender has the legal right to withdraw funds directly from your account when the payday loan matures. If by sheer bad luck you do not have enough funds in your account, you may be forced to sink further in to debt and extend apply for an overdraft from the bank in order not to miss out on other bill payments too.
Payday loans are short-term
This means that the faster it takes for your payday loan to get processed is equally the same speed it takes to mature. Payday loans take a very short time to mature – usually by the borrower’s the next payday or within 30 days.
Merits of payday loans
Payday loans have various merits that borrowers may enjoy. They provide an easy and quick way for borrowers to access cash when they meet financial emergencies. They also provide a borrowing alternative for individuals with bad credit who have been denied of bank loans or other forms of borrowing.
Demerits of payday loans
The major disadvantage of payday loans is the exorbitant interest rates charged. This makes the loan very expensive in the long run. The high cost of repayment may also have a negative impact on the borrower’s credit score which may hamper the borrower’s borrowing capacity in the near future.
Alternatives to Payday loans
Before applying for a payday loan, it is imperative that you considerday other forms of borrowing that are to your own advantage. You should enquire about other forms of borrowing that have favorable interest rates and fees such as auto title loans, personal loans and pawnbrokers, among others.