If a cash advance is needed to cover short-term expenses, borrowers have the option of taking out a payday loan. As the name implies, this type of loan is paid back when the borrower receives his or her next paycheck.
In this article, were going to be covering the topic of payday loans. We'll start by describing the application and approval process. Then we'll talk about the pros and cons of borrowing money using these types of loans. Finally, we'll provide a short list of alternatives.
Also known as paycheck, payday, and personal cash advances; these are a relatively short-term loans needed by a borrower until their next paycheck is received. This type of loan is normally offered by independent lenders that are oftentimes able to complete the entire process over the Internet.
Since the cash is usually needed on a short-term basis, the process of obtaining the loan is normally quite simple:
Once the borrower has received their paycheck, lenders will electronically remove the money borrowed plus any fees and finance charges owed the lender. Most lenders offer the option of rolling over the same loan. Each time the loan is rolled over, new fees are charged. Many states have laws in place that limit the number of times the loan can be extended using rollovers.
Truths in lending laws require clear disclosure of all the terms and conditions associated with borrowing money. This includes the full disclosure of all fees and finance charges associated with a payday loan. Lenders are also required to provide the borrower with the loan's calculated Annual Percentage Rate, which provides a standardized measure of the overall cost of the loan.
Borrowers must meet certain qualifications before loans are approved. Even with a bad or no credit status, a borrower may still qualify. Requirements usually include:
Note: Due to specific protections, active military personnel may be excluded from receiving payday loans from certain lenders.
The major advantage of a cash advance is the near instant access to money. But as we'll soon see, this benefit comes with a high price. The advantages and disadvantages of these loans are summarized below.
One of the biggest drawbacks to payday loans is their cost. This is evident when comparing the Annual Percentage Rate, or APR, to more conventional loans. A sampling of typical interest rates appears below for two of the largest states in the nation as of October 2020:
Using the above rates as an example, an individual in California looking to borrow $200 would be required to repay roughly $235 after only eight days. Interestingly, borrowing $200 over 14 days would only cost the borrower about $1 more. The high interest rates, along with less-than-favorable terms, frequently result in payday loans falling under the label of predatory lending.
If the high rate of interest on these loans is alarming, it's good to know there are viable alternatives that borrowers can explore:
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