You have probably had some questions before taking out a payday loan. There may be other questions that you don’t have if you haven’t yet. To help you make informed decisions about whether payday loans are right for you, we have the answers to all your questions.
One of the most well-known types of unsecured short-term loans is payday loans. There are many myths and facts about payday loans. You may be wondering why so many people take out payday loans and what they are. Continue reading to find out more.
Payday loans: What are they?
A payday loan allows individuals to obtain fast cash in an urgent situation without the need to prove creditworthiness or make long-term commitments. The borrower pays the loan back in one payment when they receive their next paycheck.
Payday loans can be very useful if you aren’t able to get a traditional loan from a bank, such as a home loan or signature loan. They can be used responsibly and offer an alternative for borrowers who have no other borrowing options.
What Do People Use?
A large percentage of U.S. households do not have enough savings for emergencies and struggle to make ends meet month-to-month. Payday loans can be used as an emergency cash advance to cover unexpected expenses like car repairs and medical bills. They also serve as a way for people to pay their monthly rent or utilities.
Pew Charitable Trusts says that problems with repayments are often caused by borrowers living beyond their means. 71% have taken out at least nine payday loans in the past 12 months. This shows that people use multiple rollovers of previous loans to help pay for essential items. The average borrower has a debt load of approximately five months.
If used correctly, payday loans are one tool that can be used to improve one’s financial situation. It is however important to be aware of and understand its limitations.
How Do You Benefit?
Payday loan users often reap the benefits of them in the following ways:
Get out of debt fast: One to two loans can help get a borrower off the ground. But if it becomes a habitual thing, and there isn’t any change in life (no income growth), then the borrower could end up in an endless cycle. Fast cash access: There is usually no paperwork or approval required. Once approved, lenders can provide cash quickly to customers to pay bills or fulfill other financial obligations. A valuable service: Although many people consider payday loans to be bad, they can serve a purpose.
What’s the Risk?
It is not common for people to be aware of the APRs that can be high. Even $15 per $100 borrowed in a single month amounts to $1,560 for a two-week loan. A payday loan can also be costly because of the one-time fees that many pay. These fees range from 10% to 20% of the amount borrowed. Borrowers need to know what they will owe before getting a payday loan. They should also read the contract carefully to understand their repayment terms. The accrued interest fees and risks of excessive usage can also be harmful, as we have already mentioned.
What will my borrowing limit be?
The amount you can borrow for payday loans is limited because they are meant to be temporary and emergency solutions. Your payday loan will allow you to borrow up to $1,000. Any additional amounts will need to be arranged separately.
Should I apply for a loan to increase my income?
You don’t need to apply for another loan if your current one is not sufficient. You can always request another loan, and you can continue borrowing until you pay off the whole $1,000.
Payday loans can be considered safe as you are not physically hurt by taking them out. They can also be risky because the interest rates are high, and it is easy for people to borrow more than they need. You shouldn’t borrow the money you cannot afford to repay once your paycheck arrives.
What happens if I don’t have the money?
Failure to repay the loan in full before your next payday will result in additional fees and interest. These may be higher than the original amount. This can be a problem, so it is important to speak with your lender immediately to discuss an alternative payment plan.
While there are potential risks associated with taking a cash advance, it can provide funding for unexpected expenses. A payday loan should not be used as a last-resort option in a financial crisis.
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