What Is a Payday Loan?
A payday loan is a loan issued by a private party (bank or financial institution ) designed to help you reach your next paycheck. They are usually in the form of microloans, which are small amounts of money with relatively high interest. They’re designed for people living paycheck to paycheck and come in many different shapes and forms. While they might be helpful, taking them for a long time could wind up costing 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 cash that is lent. 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’ll have to find a reliable lender and make a payoff plan.
These types of loans are most often used to purchase groceries, pay urgent expenses, or simply 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 wind up costing an excessive amount of money.
The Common Traits Of PayDay Loans
While there aren’t many types of payday loans per se, almost all payday loans 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 a 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?
There are a lot of fees placed on payday loans, and the interest rates are sky-high. That is the primary reason why payday loans have quite a bad reputation. One of the most prominent costs of getting a payday loan is the interest fees, which can rack up to 20% of the original sum at times. Depending on the pay off time, the loan amount, and the lender, the interest rates will vary, but they’ll always be relatively high.
The costs of processing these types of loans are also pretty high, as there is a commission fee on most payday loans. Other fees that exist 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.
Pros and Cons of Payday Loans
Payday loans come with a significant amount of drawbacks, but do have some advantages. Based on your personal 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 required
What are PayDay Loan Disadvantages:
- Expensive and has high interest
- Not recommended by federal institutions
- Could ruin your credit score
- It may lead to a debt cycle
Bottom Line
Payday loans might be life-saving at certain points – more often than not, they’re not worth it. The astronomical fees credit ruining potential, and high-interest rates make these types of loans less than ideal for most consumers.