What is a Payday loan?
This is normally a short term loan, normally unsecured. These loans are not, despite their names dependent on whatever day your salary or wage is paid on. Payday loans depend on the borrower having a previous employment and payroll record and that is where all consideration of your financial position to take out a loan and repay it ends. These short term loans normally have a higher interest rate attached. Different states have different legislation on the amount of interest charged 36 – 40% APR ( annual percentage rate) being the norm but be aware, calculating the APR is not regulated as such and can create an enormous difference in the payback amount anything from 350% – 3500%. Strict attention to the terms and conditions and payback is necessary unless you want to find yourself in the uncomfortable position of a cycle of payday loans.
When you borrow from a legitimate lender your credit ability is accessed, how much you can borrow and payback is worked out with you to form a responsible payment plan. This is not the case with a payday loan. They can look attractive, offering a short term loan amount to be paid back say within the month; but according to research this is what happens:
- You borrow a certain amount for example, over a month.
- You organize a pre signed check or authorize an electronic debit payment to pay the loan and interest back by a certain date, normally around your payday – hence the name..
- The lending fee, anything from $45 upwards depending on the loan amount, will be taken out of the advance.
- In a cycle of payday loans the borrower most times has not got the cash available to pay the amount back on time, resulting in returned or bounced check fees and as the lenders can repeatedly re- present the checks the balance of your debt continues to rise.
- To manage the debt another shorter payday loan is taken out, to pay of the original loan. This also includes another lending fee and interest and needs to be paid back in a particular time frame and so the cycle begins…
Most individuals take out payday loans to help them through a cash crisis, but in reality research has shown that this can actually exacerbate the problem. Laws are in place to control payday loans and in some states they are banned but if you find yourself trapped in this cycle of borrowing to pay back debt from other loans, seek professional help to assist you manage your money and debt more responsibly.