Payday loans are short-term and high-cost loans for a relatively small amount like $500 or even less. The purpose of a payday loan is to meet current liability and pay it back to the lender as soon as the next paycheck arrives. This kind of loan is available to customers with a bank account and an income source.
Also, people with non-existing or bad credit scores can opt for payday loans. However, financial experts have deep concerns when it comes to payday loans. Are payday loans a scam? Continue reading the post to learn more about it.
HOW DO A PAYDAY LOAN WORKS?
The process is straightforward. A lender confirms the borrower’s income, check account information, and delivers cash within a few minutes, say within 20 minutes, at specific stores. If the transaction was online, it reached the borrower within the same day.
In return, the payday lender asks you for a signed check. Or ask for your permission to withdraw the amount electronically from your bank account. The payday loan becomes due on the upcoming payday, which might be two weeks or a month.
When the loan is disbursed at a store, the lender makes an appointment for you on the date when the loan is due. However, if you don’t present yourself on the scheduled date, the lender deposits the check or withdraws the unpaid amount, including the interest. And, online lenders conduct an electronic method of withdrawal.
HOW MUCH DO PAYDAY LOANS COST?
In general, the cost of a payday loan is about $15 for every loan amount of $100. Therefore, for a two-week loan term, this could be around 391% APR. Moreover, if the borrower fails to return the amount on the stipulated date, an extra fee is added, and the cycle repeats.
In a couple of months, borrowers could end up owing more money in terms of interest besides the actual loan amount. This is the reason why payday loans are very risky and, at the same time, tempting as well. It’s easy to fall prey to this cycle of debt, and it takes much effort to get out of it.
WHO TAKES SUCH EXPENSIVE LOANS?
The typical borrower of payday loans is aged between 25 and 35 years. Most of them have full-time jobs with rented accommodation. Even the income distribution of payday loan customers is quite similar to that of a wider population.
Because of higher interest rates, people opt for payday loans as a last resort. While they know the ridiculous interest rate, they feel that they ran out of alternatives. It is tragic for any adult to find themselves in this situation.
HOW MUCH CAN YOU BORROW WITH PAYDAY LOANS?
The amount you would like to borrow depends on the existing state laws and your finances. So, the amount varies from one place to another. However, most states allow payday loan amounts somewhere between $300 and $1000. You should check with your locality for the right amount.
Moreover, the higher loan amount doesn’t mean that you can be approved of that. To get started with, a payday lender considers your income when it comes to calculating how much they can give you a loan.
Some payday lenders might not evaluate your ability to pay the amount back or other obligations from your end. As such, you are left with overextending yourself with the loan amount alongside massive interest.
ARE THESE KINDS OF LOANS A SCAM?
When payday lenders abide by specific rules and regulations, they practice a well-regulated lending method. And, it is approved by the concerning authority as well. So, the answer to the burning question on whether payday loans are scams is official no.
However, it is seen that not every payday lender obeys the law and operates under strict guidelines. Many institutions worked irresponsibly and have lent people who can’t afford it. This is a direct violation of regulations intended to avoid vulnerable situations. Others have used manipulative and aggressive tactics to offend customers in arrears.
DOES REPAYMENT HELP TO BUILD CREDIT?
In general, paying back the payday loans doesn’t build credit. Almost every lender doesn’t bother to report the on-time payments to the concerned bureaus. As a result, the loan repayment doesn’t help improve the credit score.
However, if you fail to pay the loan amount back on time, your credit score gets a pounding. The payday lender reports the defaulter to the credit bureau institutions or sells the debts to a collection company, which will damage your credit.
WHAT ARE THE CRITERIA TO GET PAYDAY LOANS?
If you want to qualify yourself for a payday loan, you should have a bank account, income proof such as a payslip, and a valid identity card. Also, a borrower should be over 18 years of age. Some lenders might even ask you for your Social Security number. Despite that, there are chances that you might be rejected from having a payday loan. Each lender has a set of rules, and they follow them strictly.
WHAT HAPPENS IF A BORROWER CAN’T REPAY THE LOAN?
Depending on the state you are currently living in and the lender, you could be charged with a non-sufficient fund or late fee. However, there might be a rollover option where you get the chance to extend your due date. But, it comes with a fee. Moreover, a few failed attempts to bring the payment might trigger bank fees. Furthermore, if the lender cannot recover the amount, the loan is sent to a suitable collections agency.
WHEN DOES IT BECOME NECESSARY TO GET A PAYDAY LOAN?
Ask yourself some important questions before choosing a payday loan.
- Do I need a small amount to avoid the current financial liability, which is below the payday loan interest?
- Do I have the means to pay it back on time without extending further?
- Are there alternatives for short-term loans, or have I exhausted all of them?
If the answer to the above questions is yes, you might consider a payday loan.