Payday loans act as a financial leg-up when meeting financial demands is out of reach. A payday loan is a short-term, high-interest means of credit which should only be taken out when needed.
A payday loan could be the solution you are looking for. However, before making the decision to take one out, there are a few considerations that you should mull over, as explained below.
- Payday loans come attached to a hefty borrowing rate, with interest of around 400%.
- Failing to repay your loan can land you with late fees, increased interest, and will leave a mark on your credit score, jeopardizing your future borrowing prospects.
- Only 14% of payday loan borrowers can afford to fully and promptly meet their repayments.
- Payday should be used in emergencies, such as being hit with a medical or home repair bill that cannot be left unpaid.
- You can only take out a payday loan if you meet the eligibility requirements, such as being over 18 and have an active checking account.
Do I Really Need A Payday Loan?
There are days when we all wish that we had a few extra dollars to our name, but that is not what payday loans are for. Payday loans are there to tide you over when need money in an emergency you cannot meet costs that need covering.
Most borrowers will use their payday loans to cover:
- Unexpected medical or dental bills,
- Essential home or car repairs,
- Rental payments,
- Funeral costs.
If you are considering a payday loan, your cost should match the features of the reasons above; namely, your cost should be essential and time sensitive. Additionally, in most cases these costs are unexpected, explaining why you haven’t had the foresight to save for them. In such a case, a payday loan could be your savior. However, if you are thinking of taking out a loan to splash over the sales, think again.
How Much Can I Borrow?
How much you can borrow will vary from state to state. 37 US states allow payday loans, while 13 states – such as New York, Arizona and Arkansas – have prohibited their use.
Many states have caps on how much borrowers can secure through a payday loan. This is mainly to protect borrowers becoming saddled with unmanageable debts.
California have a tight cap set at $300, while Alabama, Missouri and New Hampshire are some of many states who have set a cap at $500. Meanwhile, states such as Oregon offer up to $50,000, and some states, like Wisconsin, outline no upper limit at all.
Your borrowing limit will also rest on your financial circumstances. For instance, if you have no-to-low income, you may be offered a smaller loan than a borrower with a larger or more regular paycheck. Similarly, some lenders will be willing to offer you greater loans if you have a stronger credit history. However, you will still be able to secure a loan with bad credit or non-existent credit record.
What Will Happen If I Can’t Pay Back My Loan?
If you choose to apply for a loan, you should already have a repayment plan in mind and know the best ways to repay your debts. Failing to repay your payday loan is not only expensive, but can compromise your financial future.
Payday loans already bear substantial interest of around 400%, that can range up to 600%, meaning that they are expensive to begin with. Failing to pay your debts on time can result in increased interest, alongside late fees.
Defaulting on payments can also cause long-term damaging effects, as it will scar your credit history. Your credit history is what enables you to enter financial agreements, from more trivial payments such as phone contracts, to life-changing financing such as a mortgage. By not paying your loan back, you could be putting your financial future prospects on the line.
If you find that you are struggling to repay your loan, you should communicate your troubles with your lender. Many lenders will be accommodating and create a restructured repayment plan with you.
How High Is The Cost Of Borrowing?
Payday loans are notoriously expensive, with average interest being 400% APR, ranging up to 600%. Nevertheless, many states have introduced regulations which have reduced how expensive they are.
Colorado, Montana and Nebraska are some of 18 states who have imposed an interest cap at 36%, making repayments cheaper and more manageable.
Let’s take an example to demonstrate how much it would cost you to take out a loan. Let’s say you need $500 for one month, and APR (interest) on it is 400%.
Cost = Amount borrowed + Interest (APR)
Amount borrowed = $500
APR = 400% for 12 months, which amasses to $2000. Given that you are only borrowing for 1 month, you only owe 1/12 of $2000, which equals $166.67. Thus, APR = $166.67.
So, total cost = $500 + $166.67, which totals $666.67.
Am I Eligible For A Payday Loan?
Most likely, yes you are! To be eligible to apply, you must meet these simple requirements:
- You must be a citizen of the US
- You must be at least 18 years of age
- You must have a regular income of at least $800 (sometimes $500) a month, but terms will vary from lender to lender.
- You must have a checking account for your funds to be transferred into.
A common misconception when it comes to borrowing is that you need a flawless credit record. While a strong credit history will always work in your favor, you will still be able to take out a loan with a poor history, and even if you don’t have a credit record.