Payday Loan Process and Why Is It Convenient?
Sometimes we may be in need of money for immediate action. That’s why it’s so important for us to be always ready and have some extra cash intended for unwanted situations like accidents and natural calamities. Home utilities are always part of the budget, so it shouldn’t be left out for sustenance. But if you have no other source when something suddenly came up because you are only depending from paycheck to paycheck, then you have no other choice but either to borrow money from your friends or relatives, or apply for personal loans.
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 are quick and hassle-free to process 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.
Several borrowers apply for these loans to provide quick solutions to their financial problems. A payday loan is sometimes called a cash advance financing. Usually, it’s the employed people who apply for this because it is a short-term financing intended for people with salary. The lender expects to be repaid by the borrower’s next payday. Due to the ability of this kind of 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 face great risk of losing money in the event that the borrower default in repayments.
Due to their unsecured nature, payday loan lenders charge very high interest rates for their loans. Extra charges are being put up by the lender as a form of security in case a borrower will not be able to pay what he has borrowed. The annual percentage rate for most loans is supposed to be 36%-40%. However, these loans have sky-high interest rates which may hit up to 300% APR. Compared to other forms of borrowing, these are 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 the 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 do not perform credit checks as eligibility in securing a payday loan.
Payday loans Online
The availability and accessibility of the internet have 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 loans within a short span of time. A loan application form has to be completed by the borrower, and during the approval of the loan, the money is deposited to the borrower’s bank account. Subsequently, on the person’s salary for the next month, 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. So that you can easily apply for financing, other lending institutions expect you to make your valuable property as security. However, for payday loans, collateral is not of great concern. This makes applying for a payday loan quite easy as you don’t need to worry about item loss in the event that you default in repayment. Lending firms require applicants to be of legal age in order to be accepted for this type of loan. 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, they 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 in their review before they pick the company to take them through the lending process. Most of these 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 into 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. The maturity period of payday loans may be quick – usually by the borrower’s 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.
The major disadvantage of this type of loans is the exorbitant interest rates charged. This makes the loan very expensive in the long run. The credit score of the borrower may be affected due to the cost of repayment that might block the person from applying for financing in the future.
If possible, you can look for other options of borrowing money that could benefit you before applying and processing a payday loan. You should inquire about other forms of borrowing that have favorable interest rates and fees such as auto title loans, personal loans, and pawnbrokers, among others.
Alex is a former budget manager turned entrepreneur. He works mainly at home on his credit score advice website and writes a financial blog on the side. He hopes to expand his business into a full online lending company for bad credit as soon as he gets enough investors.