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What is a Payday Loan

Payday loans are frequently considered a simple and quick way to get money. But there are a host of factors you need to consider before you opt for them. Beem puts the spotlight on them.
What is a Payday Loan
While payday loans have their benefits, not everyone should use them. Payday loans are expensive, yet even with poor credit, you can get one. Yet, you must consider other forms of lending. We tell you why.
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Payday loans are frequently considered a simple and quick way to get money. Originally intended to assist borrowers in covering immediate expenses until their next paycheck, the word now refers to a larger category of loans. While payday loans have their benefits, not everyone should use them. Payday loans are expensive, yet even with poor credit, you can get one. Although payday loans have drawbacks, you have many options for other forms of funding that you must consider.

What is a payday loan, and how do they work? Here’s everything you need to know.  

Are you struggling with consolidating debt, making major purchases, or meeting unexpected costs? Beem can help. Beem’s personal loan feature can help you zero in on the kind of loan that suits your requirements best and helps you sail through a financial crunch.

What is a Payday Loan

Payday loans aren’t precisely defined, but they’re frequently expensive, short-term loans (usually for $500 or less) with repayment due on your next payday. Depending on your state’s regulations, payday loans may be obtained online or through in-person payday lenders.

How Payday Loans Work

Laws governing payday loans vary from state to state and may restrict the amount you can borrow or the interest and fees the lender can charge. In several states, payday loans are illegal. If your payday loan application is accepted, you could get a cheque or cash or have the money put into your bank account. The loan must then be repaid in full, including the finance charge, by the due date, usually in 14 days or by the time you get paid again.

How Much do Payday Loans Cost?

The amount you borrow, your interest rate, your lender, and your residence all affect your loan’s cost. For instance, in Iowa, payday loans allow you to borrow up to $500, and you may be charged up to $15 for each $100 you borrow. You will need to pay an additional $75, or $575 if you borrow the entire $500. However, the daily calculation of your APR will be far higher than that. In Iowa, for instance, a loan may be taken out for a maximum of 31 days. A full-term borrower’s genuine annual percentage rate (APR) is 176%.

A loan calculator like Beem can help you get a better idea. 

How to Apply for a Payday Loan?

Payday loans are available online from several lenders. Additionally, you can apply for payday loans from nearby lenders, most modest lenders with physical locations.

You must have a government-issued ID and a bank account to apply for a payday loan. Additionally, you must present proof of income, which can be obtained from your pay stubs from employment. A payday loan’s principal is usually expressed as a percentage of your income.

How do Payday Loans Affect Credit?

Applying for a payday loan does not affect your credit score or report because many payday loan lenders don’t conduct credit checks. It also does not affect your credit if you borrow the money and pay it back in full and on schedule.

However, if you fail to repay your loan in full and your payday loan provider hasn’t taken money out of your account electronically, you can be responsible for the remaining sum as well as any unpaid financing charges. The lender may use a collection agency and place a delinquent mark on your credit record if your payments are past due.

Benefits of Payday Loan

Let’s look at some of the benefits of a payday loan.

For many borrowers, the most significant benefit is that payday loans are easy and quick to apply for. In contrast to more conventional lending options, you can apply online in minutes. They are less restrictive than other loans.

Payday loans draw many borrowers because their acceptance requirements are frequently more lenient than those of other loan types. 

With bad credit, you can still be accepted. Payday lenders are more likely than some traditional lenders to approve loans with poor credit. 

This loan is not secured. Consequently, it is even feasible for consumers with bad credit histories to be granted a payday loan without having to pledge any property as collateral. 

Risks and Considerations

Here are some risks you need to consider when taking a payday loan.

They cost a lot.

Payday loans can sometimes be highly costly. Certain lenders charge interest rates that reach 1,500% APR, which can lead to a sharp increase in the overall cost of borrowing. 

Payday loans are viewed as exploitative.

Some view payday loans as predatory since they prey on those with poor credit and low incomes.

It is simple to become trapped in a debt cycle.

If you don’t repay your payday loan on time, you risk entering a debt cycle. At this point, you may need to take out a second loan to pay off your current debt, and it is easy to see how this could result in a very challenging circumstance.

Conclusion

Payday loans are expensive and may only sometimes be beneficial. Although it’s one approach to having cash on hand until your next pay period, there may be more hazards than rewards. Beem does not recommend using payday loans. Instead, consider your alternatives, such as credit cards, payday alternative loans, and personal loans.

Frequently Asked Questions

Are payday loans a good idea?

Absolutely, if there isn’t any other method for you to satisfy an urgent requirement like paying your rent, purchasing food, or paying your electric bill before your electricity is cut off, you can consider payday loans.

Why is it called a payday loan?

In most cases, you can repay the whole loan total within 10 to 14 days of taking it out, or on your subsequent payday. A sort of no-credit check loan known as a payday loan requires simple documentation of your paycheck to be approved.

What is another name for a payday loan?

The loans are also called “cash advances,” albeit the phrase can also apply to funds disbursed against a credit card or other predetermined line of credit. The laws governing payday loans varied significantly between nations and, in federal systems, between states or provinces.

Is a payday loan fixed or variable?

Payday loans have exorbitant costs and interest rates. Generally speaking, the costs are fixed and assessed based on the loan amount. This makes payday loans an expensive kind of credit.

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Author

Picture of Johnathan James

Johnathan James

With over 11 years of experience, Johnathan started his writing career as a copywriter. Coming from a finance and management background, he excels in covering financial topics. When he's not spurning out fintech content, you will find him playing football, basketball and racing.

Editor

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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