When you need cash quickly and don’t have the money in the bank or saved up, you have no choice but to borrow the money you need. If speed is important, many types of loans won’t work, because they require lots of paperwork and things like background and credit checks which could add days, if not weeks to the whole process. If your credit score is low, this also eliminates many types of loan options. So what is left for a person who needs cash fast and has a low credit score?
Some of the few options left would be loan from a friend, loved one or family member. Or a cash advance from your employer. If you have access to a credit card, you can use your credit card to pay the bill or take a cash advance.
But if none of the options above work, payday loans are your last hope. If you’re wondering just what are payday loans are and how payday loans work, we’ve written this article just for you.
What are payday loans?
Payday loans are a short term loan where you can borrow a small amount of money at a very high rate of interest. These loans are also known as cash advance loans or check advance loans.
Payday loans are short term, meaning you must pay the loan back by your next paycheck. And you will want to pay off your payday loans that quickly or you’ll end up paying more than you imagined to borrow the money using payday loans.
How payday loans work
Payday loans are meant to help a borrower who is short on cash make it until their next paycheck. Payday loans are for smaller amounts of money that can be repaid quickly. Payday loans must usually be paid by the next paycheck.
Before the lender gives a borrower the cash they need, the borrower must make arrangements to pay the loan back. The borrower has two ways to pay the loan back: a post dated personal check or a preset electronic withdrawal from their account on their payday.
The first repayment option involves a borrower writing a post dated personal check in the amount they wish to borrow plus the loan fees to the lender. The lender holds onto the check and cashes it on the agreed upon date which is usually the borrower's next payday.
The second repayment option works in a similar way but is handled electronically. The payday loans company will set up a withdrawal from your bank account for the loan and loan fees to debit your bank account on your next payday.
What are payday loans good for?
Applying for payday loans are convenient when you need money fast, the amount you need is small and you can repay the payday loan back by your next paycheck. How payday loans work best are by using them for:
Getting money quickly
If you need quick access to a couple of hundred of dollars immediately, a payday loan can work well for you. Payday loans companies will give you approved funds shortly after you apply.
To get you through to your next paycheck
If you are short between paychecks, payday loans can bridge that gap. Some good expenses that payday loans can help you with include the money you need to:
- Pay your bills like phone, utility or rent
- Pay off past due bills before you get slapped with more finance charges
- Buy groceries or other supplies
- Get your car fixed
- Cover unexpected emergencies or bills that have popped up that you did not budget for
What fees and charges do payday loans companies normally charge?
Payday loans vary from state to state. And that’s because payday lenders are restricted by laws and regulations as to how much they can charge you in rates and fees. These are some of the most similar rules for most payday loans:
- You will be charged an interest calculated using Annual Percentage Rate (APR). Each state will restrict payday lenders to control how much interest they can charge a borrower. In states like California, the maximum APR for a 14-day loan up to $100 cannot exceed 459%.
- Lenders cannot charge more than a certain percentage, usually 15% in fees and charges on the amount you wrote on the post dated check. For example, if you get a $100 loan for two weeks, you won’t have to pay more than $15 - $18 in fees as a finance charge.
- If your check bounces, expect to pay a fee of around $15.
How to apply for payday loans
You can apply for payday loans online or by visiting a payday loans store. Before you apply, make sure you meet the following criteria:
- You’re at least 18 years of age.
- You have proof of a regular source of income.
- You’re an American citizen or a permanent resident.
- You can prove you are a resident of the state you are applying for the payday loan in.
The loan application will ask you for the following items:
- Date of birth
- Contact information including residential address, phone number and email address
- Employment and income details
What else should I know about payday loans?
Payday loans are a vital lending option for many people who can’t borrow money other ways. To survive and be able to use payday loans successfully, the most important advice is to only borrow that which you can afford to payback with your next paycheck. Payday loans can be expensive borrowing options, but sometimes necessary, regardless of how much they cost.
Don’t forget that you need to repay the payday loan next paycheck. Look and plan ahead before you borrow using payday loans! The last thing you need is to find yourself behind in the bills again the following month because your payday loans left you with hardly any money after you paid the loans off. This will lead to a downward spiral where you will need to borrow again and again to get you through to the next paycheck.
With proper budgeting and planning, payday loans will help you bridge the budget gap between paychecks. Borrow wisely to make the most of payday loans.