If you have never had a payday loan, you might wonder why anyone would get one. After all, every loan accrues interest, so why get one for the short-term? When someone is living paycheck to paycheck it's difficult to come up with quick cash for any unexpected bills. These could possibly include getting your car fixed, medical treatment or a quick visit to your parents that live out of town.
If you are like me, you have a rule against borrowing money from family and friends because you have been down that road already and it only got messy. The only answer may be a payday loan, which is a short-term solution.
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Advantages vs. Disadvantages
First of all, sit down and compare the advantages and disadvantages of payday loans and decide if it's something that will work for you. Some of the advantages are:
1) It's easy to apply (Internet, phone or in person)
2) No credit checks
3) Money can be deposited directly into your checking account
4) No upfront costs
5) Private (Your financial information isn't shared with anyone)
The disadvantages are subject to personal choices:
1) Can you repay the loan plus the fees when your payday arrives?
2) Is there any other way you can get the money?
3) Are there things around the house you might be able to sell?
These are questions you should be asking yourself before taking out a payday loan. Of course, if there are other means for you to get the money, that is preferable.
How it Works
Now that you've decided a payday loan is the correct decision, let's go over the process. To help you visualize it, we'll go through a typical example. Say the borrower needs a loan for two weeks until their next payday. Proof of employment, valid checking account and identification are provided to the lender. Upon approval, the lender deposits $100 into the individual's checking account, and the individual authorizes a $115 withdrawal from their checking account when the loan comes due. The $15 seems low for a fee, especially when you are in dire need of extra cash, but when you calculate the cost in terms of APR it comes to an interest of 360%. In two weeks, typically on your next payday, the lender will withdraw $115 from your checking account. The transaction is now complete.
Loan Extensions
If for some reason you are unable to repay the loan when the two weeks is up, make sure to call your lender and make payment arrangements before it is due. Most payday lenders are very flexible when it comes to extending your loan. They will usually allow you to roll-over the payment until your next payday. There are some fees associated with a roll-over, but they are still cheaper than incurring an overdraft fee from your bank when the lender tries to take the money out of your checking account. Roll-overs are definitely the way to go if you can't make your payment on the due date.
Conclusion
Payday loans are great for emergencies when money is tight. Do your homework and make sure that it is the best short-term solution to your financial situation. When you decide the time is right, go through the process like you're a pro! You've learned the ins and outs of the industry. Be confident that you've made a great financial decision.
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