What Is a Payday Loan?

A payday loan is issued by a private party (bank or financial institution ) designed to help you reach your next paycheck. They are usually microloans, small amounts of money with relatively high interest. They’re designed for people living paycheck to paycheck and come in many shapes and forms. While they might be helpful, taking them for a long time could cost more than it’s worth. Due to their relatively high interest rates and middle-ranged APR, they’re not the most consumer-friendly type of loan.

Based on the lender, they can come with varying amounts of interest based on the lent cash. More often than not, these loans don’t exceed $1500, and their interest rates depend on the lender, the amount of money lent, and the payoff time. At times, the interest rate and APR fees can rack up to 20% of the original sum, which is not worthwhile for most people. Sometimes, getting a payday loan is unavoidable, so you must find a reliable lender and make a payoff plan.

These loans are often used to purchase groceries, pay urgent expenses, or get to your next paycheck. They’re usually applied for by returning borrowers, which can land them in a cycle of debt. Do not get a payday loan if you can’t afford to pay it off, as the costs and fees can be excessive.

PRO Tip
If you’re not sure that you can afford a payday loan, don’t get one. It’s always best to be financially safe and aware than to risk getting in a debt cycle. A debt cycle can ruin your credit score and financial wellness in no time.

The Common Traits Of PayDay Loans

While there aren’t many types of payday loans per se, almost all have a couple of things in common. Payday loans are:

  • Expensive
  • Short term loans
  • High-interest loans
  • High fee loans
  • Require no credit history
  • Mostly unsecured loans
  • Don’t inquire check into your credit score

While they can range in cash, most share these common traits. Another nasty thing that correlates to most payday loans is the astronomical penalty fees should you fail to pay on time. See: Guide – Loans in Canada

What are the Interest Rates and Fees on Payday Loans?

Payday loans have a bad reputation because they charge high interest rates. One of the most prominent costs is the interest fees, sometimes up to 20% of the original sum. The interest rates will vary depending on the payoff time, the loan amount, and the lender, but they’ll always be relatively high.

The costs of processing these loans are also pretty high, as there is a commission fee on most payday loans. Other fees with payday loans are late fees, rollover fees, and other processing fees. With so many fees and such an astronomical interest rate, payday loans can hurt your credit score significantly.

PRO Tip
While payday loans don’t improve your credit score, failing to pay on time could trap you in a circle of debt that is sure to have a significant impact on your credit score.

Pros and Cons of Payday Loans

Payday loans come with a significant number of drawbacks, but they do have some advantages. Based on your financial situation, you can apply for a payday loan and be fine – but you should always be cautious.

What are PayDay Loan Advantages:

  • Quick money
  • Very helpful
  • Fast approval
  • Online application
  • No credit history is required

What are PayDay Loan Disadvantages:

  • It is expensive and has a high interest
  • Not recommended by federal institutions
  • It could ruin your credit score
  • It may lead to a debt cycle

Bottom Line

Payday loans might be life-saving at specific points – but more often than not, they’re not worth it. The astronomical fees credit, credit-ruining potential, and high interest rates make these loans less than ideal for most consumers.

Frequently Asked Questions