How Payday Loans Make Money

How Payday Loans Make Money

Payday loans can be a type of cash advance that can help get you your next paycheck. Even though they are typically for small amounts, payday loans can be very costly.

People who don’t have a bank account can often use payday loans. These companies target individuals who struggle to make ends meet every month. Once you have borrowed one, it is easy to become dependent on payday loans. Learn more about payday loans and why they are not recommended.

What is a payday loans?

Payday loans are cash advances you can use for your next paycheck. Once you have been approved, the company will lend you a small amount (typically not more than $500), which you will need to repay once you get paid.

Payday loans can be applied for quickly and require minimal documentation. They’ll usually search for the following:

  • Active bank or credit union account, or pre-paid card account
  • A source of income other than a job
  • To prove your 18th birthday, you must have a valid photo ID

Usually, funds will be sent within 24 hours after approval.

Payday loan companies have many titles. Each payday loan company may have its system for collecting money and lending money. All of them make money from interest paid on existing loans and upfront fees. Payday lenders may accept postdated checks as collateral to deposit on your next payday or another agreed-upon date.

Payday lenders may offer the option to roll over your loan, but this is subject to an additional charge. To get a $200 loan you would need to pay $30. Then, the loan would be rolled over once it is due. You would have 0 in unsecured debt.

Payday loans: The dangers

Payday loan companies can set up customers to become reliant on them because the loan is due back quickly and the fees rack up. Borrowers may find it hard to repay the loan and still pay their monthly expenses. It is more difficult for borrowers to repay loans from multiple companies.

If you depend on loans, you may have a lower monthly income.

Although it is tempting to get a payday loan to pay for non-emergency items like vacations or trips at the amusement parks, it’s not smarter than saving your money over time.

Alternatives to payday loans

In most cases, payday loans should be avoided. If you need financial assistance, it is best to look at other options. Some credit unions and banks have begun to offer a similar service of small salary-advance loans but at interest rates much closer to a typical credit card.

Your employer might be able to offer you a salary raise. Your boss may be more understanding than you think.

Although it’s better to avoid credit cards than get a payday loan, it is still better than having one. Credit cards give you more control over how your payments are broken up and allow you to pay off the loan faster. Paying off your card within a few months can help you avoid costly payday loans. As they have higher interest rates, cash advances on credit cards should not be used.

Installment Loans vs. Payday Loans

When you have an emergency, there are many options. Most people have heard of payday loans and installment loans. These are two very different things and, if you have the money, installment loans are much safer. These are only a few of the differences.

Stop Borrowing

If you have been using payday loans, stop immediately. To lower your loan balance and stop the cycle of rolling it over, you can make partial payments. You should ensure you have enough money to pay your rent, food, mortgage payment, and utilities.

The loan should be paid off with all of your remaining cash. To make it easier to repay the debt, you may be able to pay the loan in two installments.

To break the cycle, you can make other changes. You could work part-time or find another way to quickly make money. It might be possible to sell your unwanted household items or find temporary work. 

You might be able to raise the money within a few months because payday loans are often small. Once you’ve paid off the loan, work to build up your emergency fund so you can avoid taking any future payday loans.

These are the Key Takeaways

  • Payday loans are cash advances that you can use to get your next paycheck.
  • They are easy to find but can be expensive.
  • Payday loan debt can often trap people in a vicious cycle. To pay additional fees, they can roll the loan over.
  • Payday loans may not be the best choice for your financial needs.

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Payday Loans Writer at | Website | + posts

Jackie Veling covers personal loans for Bridgepayday. The work she has done for Bridgepayday was highlighted by The Associated Press, MarketWatch, MSN, Nasdaq.com and Yahoo Finance. Before her work, she had an editing and writing freelance company, in which she collaborated with a range of clients such as U.S. Bank and Under Armour. The graduate of Indiana University with a bachelor's degree in journalism.

Author: Jackie Veling

Jackie Veling covers personal loans for Bridgepayday. The work she has done for Bridgepayday was highlighted by The Associated Press, MarketWatch, MSN, Nasdaq.com and Yahoo Finance. Before her work, she had an editing and writing freelance company, in which she collaborated with a range of clients such as U.S. Bank and Under Armour. The graduate of Indiana University with a bachelor's degree in journalism.