A payday loan is a small, high-interest loan that is due in full when the borrower receives his or her next salary, usually within two weeks. People with poor or nonexistent credit are nonetheless able to get payday loans because all that is required is a bank account, a paycheck stub, and a piece of government-issued ID.
Payday loans are not a good idea, according to financial experts, especially if there is any danger the borrower won’t be able to return the debt right away.
So, what exactly is a payday loan?
Payday loans are short-term unsecured loans. That’s not even a few weeks down the road, it’s that quick. Payday loans are typically made available in person via a storefront lender, while some lenders now offer their services exclusively online.
People who do need cash quickly benefit the most from payday loans. It’s so fast and easy to apply that many people don’t bother. Literally!
Typically, a payday lender will want proof of employment and bank account. They check your income to make sure you can afford the loan. Of course, there’s a deeper meaning behind the bank account as well.
What do payday loans do?
After your loan is authorized, the money will be sent to the account you provided. More importantly, the lender will want a postdated check covering both the principal and interest on the loan.
Here’s an illustration: on October 16, you’re approved for a $500 loan. Since you need to pay back the loan quickly, the date you draft the cheque should be October 30. The total amount of the cheque is $575 ($500 to cover the principal and $75 for interest on the loan).
Your lender may rest easy knowing that they will be repaid on the agreed upon date without having to follow you for the funds thanks to the postdated check. Inasmuch as payday lenders don’t care about borrowers’ credit histories, borrowers are willing to endure the postdated check arrangement.
Lenders typically demand that salary be direct-deposited into a specified, vetted bank account. Once the payroll deposit date is determined, the postdated check will be timed to clear the account at that time.
Hence the name “payday” loans.
Paying off a payday loan positively affects credit?
Repaying a payday loan often has no positive effect on credit scores. As most payday loan companies do not share payment information with credit reporting agencies, taking out a payday loan will not improve your credit rating.
However, harm to your credit score is possible if you fail to repay the loan. If you miss payments on a payday loan, the lender may inform the credit bureaus or sell the debt to a collections firm that will.
Substitutes for Payday Loans to Avoid
High-interest, long-term loans can have payback lengths of up to five years. Payday loans are not limited to those with stellar credit histories; in fact, some may even boast of doing no background checks at all. Amounts owed in interest easily add up: A loan of $3,200 for two years at an interest rate of 87% would cost a total of $6,844.
A vehicle’s title can be used as collateral for a short-term loan if you live in a state that allows them. They are similar to payday loans, except the lender has the option of repossessing your vehicle if you can’t pay it back.