A payday loan is essentially a form of short-term financing that typically lasts anywhere between 2 and 4 weeks and does not require you to put up any collateral to obtain it. These loans will usually be provided for small amounts, often $1,000 or less, and they need to be repaid in full as soon as your next paycheck arrives.
In addition, they are way more accessible compared to traditional loans, as you can often secure easy approval payday loans online, even with a bad credit score. To get a payday loan, most lenders will usually require borrowers to write a personal check for the amount owed, inclusive of the interest rates and any extra financing fees.
If the loan isn’t repaid on time, some lenders will deposit the check to recoup their money. However, most payday lenders tend to require authorization from your bank to electronically deduct the money from your account.
When Should I Consider Taking Out A Payday Loan?
Payday loans are typically borrowed by those experiencing an urgent financial crisis and needing an extra financial boost to keep them covered until their next payday. However, since these loans come with low loan limits, they are primarily meant to cater to small expenses like utility bills, grocery shopping, etc.
On the surface, these loans can often appear to be lifesavers. However, the problem with them is that they typically come with extremely exorbitant interest rates that can often make them extremely difficult to repay. In addition, the repayment period on payday loans tends to be extremely short, which can often make them extremely difficult to repay on time.
Also, while some states allow borrowers to roll over these loans to help extend the repayment period, this can often be a slippery slope that results in borrowers accumulating high fees and interest. It is for this reason that payday loans should not be taken lightly.
CocoLoan co-founder Sarah Ross went on to add, “Payday loans can be a useful line of credit for any borrower in need, but it is always important to first review your monthly budget in order to ensure that you can actually afford to make your repayments on time without fail.”
How Much Do Payday Loans Typically Cost?
Most payday loans tend to be charged at $15 per $100, on average. This means that if you were to borrow $300, you would need to pay $45—which equates to an APR of 400%. However, you should keep in mind that you would end up incurring fees if you decided to apply for a rollover or extended payment plan.
These fees will often vary by lender and state regulation, so you will need to compare different loan providers to see which one can offer the lowest fees. You also need to consider any late payment fees that you may be charged for delinquent balances.
Furthermore, if you intend on receiving your funds via prepaid debit card, then this may bring along an added cost. As a result, you should always check the fine print of the loan agreement so that you are fully informed of what to expect.
Where To Apply For Payday Loans?
Payday loans can typically be applied online, which makes them easily accessible for anyone that is 18 years of age or older and has an active bank account.
However, there are so many online lenders out there that it can often be difficult to know which lender is trustworthy and which one isn’t. After all, since they come with high interest rates, it is often common to come across predatory loan providers that aim to take advantage of borrowers in a financial crisis.
Applying through an online credit broker such as CocoLoan is a viable alternative to consider. This will ensure that you are able to compare multiple lenders at once to find the best loan offer with the most favorable rates and terms.
Are Payday Loans Worth It?
As mentioned before, payday loans come with steep interest rates and fees, which often make them extremely difficult to repay. As such, there is often a very high chance that you could find yourself falling further into debt, which is why you should take the time to consider all alternative options carefully before borrowing a payday loan.
However, if you do find yourself in urgent need of cash and you are confident that you can afford to repay the loan and interest once your next paycheck arrives, then a payday loan can make sense. These loans are also not a bad idea if you have a poor credit score that prevents you from qualifying for a traditional loan.
Best Alternatives To Payday Loans
Before you decide to take on the significant risks that are typically associated with a payday loan, you should take the time to consider other alternatives that are less costly. Some of these include:
Overdraft: You can secure a bank overdraft, which essentially means that your bank agrees to lend you money to be repaid at a later date. The APRs on overdrafts will often range between 15% and 40%, which makes them significantly cheaper than payday loans.
However, keep in mind that overdrafts can lead you into debt that you may not be fully prepared for, and if not handled correctly, they could result in your credit score being lowered significantly.
Family or friends: While borrowing from friends or family can be an uncomfortable experience, it can also be the best option to consider for your financial situation. After all, you can often negotiate for more favorable lending terms, and you may even be able to save money by not having to pay any interest.
Home equity loan: You can consider borrowing via home equity, as this can often facilitate a much more favorable interest rate than a payday loan. These loans also allow you to access large amounts of cash that can be used to consolidate debt or cover other major expenses. However, to use this line of credit, you will need to have a steady income, a good credit score, and a low debt-to-income ratio.
Payroll advance: Another viable option worth considering is asking your employer to provide you with an advance from your future wages. This can allow you to avoid having to pay any interest and can enable you to access the funding you need in a hurry. However, not all employers are open to this idea, so the final decision can often depend on your performance at work and the relationship you have with them.
Bottom line
With short repayment timelines and steep interest rates, payday loans are not always the best choice for credit. They come with a huge risk, which is why they should only be considered as a last resort. Before you take out a payday loan, make sure that you have eliminated all the alternatives listed above.
However, if you still feel the need to borrow a payday loan, take the time to review your monthly budget and earnings to make sure that you can truly afford to make the necessary repayments on time. It also helps to use a credit service like CocoLoan, which will enable you to find the ideal loan provider that can offer favorable rates and terms that best suit your current budget and needs.
