A payday loan is a short-term, very expensive form of credit. It’s not for everyone – but if you can afford to pay it off on time, then it may be your best bet.
There are many different types of loans available, and while they all have their own terms and conditions, one thing is common across most of them: interest rates that can easily reach 300% APR (annual percentage rate), even when you pay your loan back in full and on time.
What makes these kinds of loans so problematic is that they’re designed to get you into debt as quickly as possible. If you don’t know what a payday loan is or how to avoid getting one, here’s everything you need to know.
Let’s start with an easy definition: a payday loan is a type of “emergency” loan given to cash-strapped borrowers who don’t qualify for other forms of credit. The reason payday lenders are able to offer such high interest rates is because they’re not regulated by the same laws that govern banks and other lending institutions. They’re also often located outside of bank branches, which mean potential customers must travel long distances to make payments.
In some states, payday lenders are required to advertise themselves as “high-cost lenders,” which is why you might see advertisements touting “payday loans: up to $1,000″ or “payday loans: up to $300″.
While those ads tell you how much you’ll actually borrow, it doesn’t necessarily reflect the cost of the loan itself. Most people who use payday loans do so for less than $1000; they’re just trying to cover unexpected expenses until they can get their next paycheck.
The problem with payday loans is that they’re designed to get you in deep financial trouble as quickly as possible. As we mentioned earlier, many are advertised as “up to $1,000″ or “up to $300″ – but you won’t actually get $1,000 or $300; instead, you’ll end up borrowing far more than either amount. In fact, payday lenders typically charge fees that add up to hundreds of dollars over and above the amount you borrowed.
This is where the interest comes in: if you don’t pay off your loan in full on time, your lender will continue to charge you compound interest each month, compounding the total cost of your original loan. This means you could end up paying hundreds of dollars in extra charges every month, even after you’ve paid your loan back in full.
As you can imagine, this can lead many people into serious debt problems. And since there are no regulations stopping payday lenders from charging exorbitant interest rates, it can become impossible to pay them back at any point in the future.
If you think that sounds like a gamble worth taking, here’s what you need to know about the risks involved.
How Much Do Payday Loans Cost?
The exact cost of a payday loan varies depending upon where you live, but in general, the average cost of a single payday loan is $276. That figure includes the usual fees associated with most payday loans, plus the loan amount itself, which can range anywhere from $100 to $1500.
If you fail to repay your loan in full within the allotted timeframe, additional fees will be charged automatically each month to cover the accumulated interest. These fees can amount to hundreds of dollars per month, and even though you’re technically paying off your loan, you’re still trapped in debt.
Keep in mind that even if you pay off your entire loan without incurring any additional fees, you’ll still owe the money that was originally borrowed (plus interest) when your next check arrives. The only difference between payday loan and traditional credit is that you can’t apply for another loan to get out of your current one.
Can I Get a Refund From My Lender After Repaying My Loan?
Yes! There is generally a grace period after you’ve repaid your payday loan that lasts 30 days to 60 days. During this period, you can request a refund that covers both the principal amount of the loan and any accrued interest.
However, keep in mind that once this grace period ends, you’ll no longer be entitled to a free loan payment. Any outstanding balance due will need to be paid before your lender will issue you another loan.
Am I Eligible For A Payday Loan?
No. If you already have access to other forms of credit, such as a credit card or a car loan, you won’t qualify for a payday loan. You may even be denied a credit card if you have a history of late payments.
To make sure you’re not applying for a payday loan simply to cover an emergency expense, you should look closely at your monthly income. If you receive a regular paycheck, it’s usually safe to assume that you’ll be earning enough to pay for things like rent, groceries and utilities on time.
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Finding Alternatives to Payday Loans
In order to avoid getting into debt with a payday loan, you need to understand exactly what happens when you take one out. Once you have a better understanding of the risks involved, you’ll be able to find ways to avoid getting yourself into a situation where you really need a payday loan to make ends meet.
Before you go looking for a payday loan, try putting together an emergency fund. You can save up 10%-20% of your salary for about six months. Then, once your emergency fund is fully funded, you should set aside another three months’ worth of savings for any unexpected expenses that crop up during that time frame.