A payday loan is a short-term loan, generally made out for a relatively small amount of money, that is typically due to be paid off when the borrower receives his or her next paycheck. Payday loans are also known as “cash advances” or “check loans”. Payday loans are structured to be paid off in a one-time lump-sum payment, but there are cases in which the loans are structured in a way so that the payment is done in installments over a longer period of time. Payday loans usually give out around $500, although some may go as high as $1,000. The finance charge (cost of the loan) of a payday loan can range anywhere from $10 to $30 for every $100 borrowed. As a result, a two-week payday loan with a $15 fee per $100 borrowed will equate to an annual percentage rate (APR) of 400%, a rate that is 13 to 33 times higher than APRs found on typical credit cards. These finance charges are usually accompanied by interest rates that range from 300% to 750% APR. If the payday loan lasts for a period of time shorter than two weeks, the rates can be even higher, ending up at an annualized rate of 900% or more.
Payday loans are controversial for several reasons. Some advocate the use of payday loans whereas some severely criticize the concept. Listed below are some pros and cons of payday loans, and you can use the information to judge for yourself whether or not a payday loan is a good option for you.
- Individuals with little or no credit can receive several hundreds of dollars in one day.
- All one needs to qualify for a payday loan is a steady income, a state-issued ID, and a checking account.
- No explanations for the use of the money is needed, and the money received can be used for anything, ranging from an emergency to a vacation.
- The loan process itself usually takes less than an hour, and the money can be deposited into your bank account within the day.
- Payday loans offer a small amount of money compared to other loans.
- Borrowers are liable for the full amount of money borrowed, and failing to pay it off can severely damage one’s credit score.
- Payday loans come with high interest rates.
Generally speaking, it is good practice to avoid taking out payday loans, but there are times that call for desperate measures. If you do end up deciding to take out a payday loan, make sure you are able to pay off the amount when it is due.