Understand How Payday Loans Work Before Applying For One
Payday loans always come through for many people when they’re low in cash. They can save you during a financial emergency as you wait for your next paycheck.
But like any other loan, they come with their requirements. You need to understand everything about the loans before you proceed to apply for one.
How Payday Loans Work
Payday loans are short term loans offered on the borrower’s next paycheck. These loans are either processed online or through brick and mortar locations. A lender may request a hard credit check to determine your credit score before giving you a payday loan. You’ll also need to provide proof of income and your pay date when applying for the loan.
If you qualify, the lender will then deposit the money to your bank account or give you a check. Other lenders can give you cash. They’ll give you a period of 14 days or by your next payday to pay the loan plus the interest amount.
How Payday Loans Affect Credit Score
Payday lenders may request a hard credit check before processing your loan. But most of the time, they don’t do a credit check which means the loan will not affect your credit score or appear in your report. Because they won’t appear in your credit report, they’ll not lower or improve your credit score.
But sometimes, you may default the loan, and the lender goes to the extent of reporting your account to a collection agency. The agency will take charge of the loan collection process and will report the account to the credit reporting bureaus. That’s how your payday loan may end up affecting your credit score.
Payday Loan Amounts
There’s no specific amount for a payday loan. The amount varies with many things, including the borrower’s income. The amount of loan can also vary from lender to lender. Some states can regulate the maximum amounts for payday loans.
Other states also restrict borrowers from taking multiple payday loans. This is usually an attempt to keep borrowers from taking large amounts of money than they can afford. Depending on your income, state laws, and lender, a payday loan may vary from $50 to $3,000.
Payday Loan Interest Rates
Since payday loans are short-term, they’re known to attract a pretty high-interest rate. Some rates may go beyond 500% or even 1,000%. Well, there are regulations and models put in place to regulate the amounts and loan duration.
You need to talk with your lender before taking the loan, so you’re well prepared. Knowing how much you’re going to pay as interest psychologically prepares you. This way, you don’t end up in confusion once the payment date arrives.
Payday Loan Options
Payday loans are good for emergencies when you have no other cash alternatives. But since they can be expensive, sometimes you might need to consider alternatives.
If you think these are not for you, consider borrowing from friends or bad credit personal loans. Also, don’t forget to check your credit report to understand where you stand as a borrower.