If you’ve incurred sudden emergency expenses and don’t have enough savings to cover them, you might be considering a popular loan option: payday loans. According to this study, almost twelve million Americans use payday loans every year. What are these loans? How do they differ from typical bank lending or credit cards? Keep reading to learn all this and more about payday loans and when it makes sense to get one.
Short-Term and High-Interest
So, how do payday loans work? Payday loans are essentially high-interest, short-term loans that have a repayment period of usually only a few weeks. The term “payday loan” comes from the idea that you’ll repay the loan once you get your next paycheck. Payday loans can be acquired from online lenders or brick-and-mortar stores; though online lenders have appealing conveniences.
The interest rates for payday loans vary per lender but can be high. With such high-interest rates, it’s critical that you pay back your loan as soon as possible to avoid extra costs.
When you take out a payday loan, you’re often required to write a post-dated check or set up an auto-debit for the principal amount, plus the interest you’ll accrue in the time between paychecks. This check acts as a sort of insurance policy for the lender since they’ll be able to withdraw the funds directly from your account once your paycheck is deposited.
Short Repayment Times
One of the benefits of traditional loans or installment loans is the ability to repay the borrowed amount over the course of months or even years. This stretches out the dollar amount, granting you a monthly payment that is significantly more affordable than the original balance all at once. With payday loans, you only get a few weeks to pay back your borrowed amount; eliminating the convenience of a monthly installment plan.
Why Do People Choose Payday Loans?
With poor credit scores or no money in savings, a payday loan is sometimes the best option people have available to them. A poor credit score could prevent you from acquiring a traditional loan, leaving you with few options when major expenses arise.
A large majority of American households either don’t have a savings account or have very little saved up. Unexpected car repairs, emergency medical bills, or sudden legal expenses can appear overnight, leaving those without savings or poor credit with no way to address these costs. Hence, the payday loan.
Should I Get One?
If you’ve incurred a sudden emergency expense and find yourself too short on savings to cover the costs, you might be considering a payday loan. While this type of lending isn’t for everyone, it does offer a chance to pay off those unexpected short-term expenses and help you get back on track.
Before you apply for a payday loan, make sure you can repay the amount you’re borrowing. With easy approval, it can be incredibly tempting to opt for more funding; but if you can’t pay back what you borrowed with one paycheck, you shouldn’t borrow it! Borrow only as much as you need to address your sudden expenses.
Remember that a payday loan will come with a very high interest rate, so you’ll want to account for that when you’re deciding whether or not you can afford it. At the end of the loan, you’ll pay back the principal balance, plus the interest; so be sure you know exactly how much interest is being added to your balance beforehand.
Payday loans are best reserved for emergencies. Making a habit of acquiring these types of loans can become problematic should you default or miss a payment. With higher rates and shorter repayment times, you’re taking more of a risk than with traditional lending, so be wise about how much you borrow and where you borrow from.
The Bottom Line
Payday loans make sense in certain situations. If you have no savings and poor credit, these loans can help you address sudden expenses or monthly bills. Be sure to read all of the terms of your loan, and always pay the loan back on time.