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How does Payday Loans Work | Payday Loans Alternatives

What is a Payday Loan?

Payday loans are unsecured cash advances for small amounts (usually less than $1,000) with very high interest rates and short-term repayment demands. A typical loan is $500, which borrowers often need to cover essentials such as rent, utilities, food or medical bills. Although the name suggests the loan is tied to a borrower's paycheck, lenders will sometimes issue a loan if they are certain that the borrower will have access to repayment cash soon.

In the United States, payday loan operators typically operate from storefronts in low-income neighborhoods. Their customers generally have poor credit and no other access to money to cover urgent bills. Payday lenders use a variety of methods to calculate interest rates, often asking for around 400% on an annual basis.

Although many people assume that payday lenders charge higher interest because they deal with high-risk customers, default rates are usually quite low. Many states now regulate payday loan interest rates, and many lenders have withdrawn from states that do so.

 

How does Payday Loans Work  Payday Loans Alternatives

Also see How to get a personal loan of $5000 in easy steps

How does Payday Loans Work?

Payday loans are a quick solution for consumers in a financial crisis, but they are also budget-busting expenses for families and individuals.

Here's how a payday loan works:

Consumers fill out a registration form at a payday loan office or online. Only identity, a recent salary slip and bank account number are the documents required.

The loan amount varies from $50 to $1,000, depending on the law in your state. Once approved, you get cash on the spot, or it gets credited to your bank account within a day or two.

Full payment is due on the borrower's next payday, which is usually two weeks.

Lenders either post-date a personal check to coincide with their next paycheck or allow the lender to automatically withdraw money from their account.

Payday lenders typically charge interest of $15-$20 for every $100 borrowed. Calculated on an annual percentage rate basis (APR) — used for credit cards, mortgages, auto loans, etc. — that APR ranges from 391% to 521% for payday loans.

What if you can't repay the Payday Loan?

If a consumer cannot pay off the loan by the two-week deadline, they can ask the lender to "roll over" the loan. If the borrower's state allows it, the borrower pays only the fees due, and the loan is extended. But interest adds up, as do finance charges.

For example, the average payday loan is $375. Using the minimum finance fee available ($15 per $100 borrowed), the customer is owed a finance fee of $56.25 for a total loan amount of $431.25.

If they chose to "roll over" the payday loan, the new amount would be $495.94. That amount borrowed is $431.25, plus a finance charge of $64.69 = $495.94.

Thus a loan of $375 becomes about $500 in a month.

 

How Payday Loan Finance Fees Are Calculated

The average payday loan in 2021 was $375. The average interest -- or "finance fee" as payday lenders refer to it -- for a $375 loan will be between $56.25 and $75, depending on the terms.

That interest/finance fee is typically between 15% and 20%, depending on the lender, but can be higher. State laws regulate the maximum interest a payday lender can charge.

The amount of interest paid is calculated by multiplying the amount borrowed by the interest charge.

From a mathematical point of view, this looks like this for a 15% loan: 375 x .15 = 56.25. If you accepted the $20 per $100 loan (20%), it would look something like this: 375 x .20 = 75.

This means you would have to pay $56.25 to borrow $375. That is, the interest rate of 391% APR. If you pay $20 per $100 borrowed, you pay a finance fee of $75 and an interest rate of 521% APR.

 

How Payday Loan Interest Rates Are Calculated

The annual percentage interest rate (APR) for payday loans is calculated by dividing the amount of interest paid by the amount borrowed; multiplying it by 365; Divide that number by the length of the repayment period; and multiply by 100.

In mathematical terms, the APR calculation on a $375 loan looks like this:

56.25 375 = .15 x 365 = 54.75 14 = 3.91 x 100 = 391%.

375 375 = .2 x 365 = 73 14 = 5.21 x 100 = 521%: 375 375 = .2 x 365 = 73 14 = 375 = 375.

Again, the APR is astronomically higher than any other lending offering. If you used a credit card instead, even at the highest credit card rate available, you're paying less than one-tenth of the amount of interest on a payday loan.

 

Alternatives of Payday Loans

Surveys show that 12 million American consumers receive payday loans each year, despite ample evidence that they send most borrowers into deep debt.

There are other ways to get debt relief without resorting to payday loans. Community agencies, churches and private charities are the easiest places to try.

Paycheck Advance: Many companies give employees the opportunity to receive earned money before their paychecks are due. For example, if an employee worked seven days and the next scheduled paycheck is not due for the next five days, the company may pay the employee for seven days. This is not a loan. It will be deducted on the next pay day.

Borrowing from family or friends: Borrowing money from friends or family is a quicker and often less expensive way to get yourself out of trouble. You'll expect to pay a very low interest rate and a far more generous time frame of two weeks to pay off the loan, but make sure it's a business deal that pleases both parties. Prepare an agreement that explains the terms of the loan. And stick to it.

Credit counseling: Non-profit credit counseling agencies like Incharge Debt Solutions offer free advice on setting up an affordable monthly budget and clearing off debt. InCharge credit counselors can direct you to locations in your area that provide assistance with food, clothing, rent and utility bills to help people overcome financial woes.

Debt Management Plans: Non-profit credit counseling agencies like InCharge also offer a service at a monthly fee to reduce credit card debt through debt management plans. The creditor offers the agency a lower interest rate, and you can agree whether to accept it. The agency pays creditors, and you make a monthly payment to the agency, which frees up money so you can pay your bills and reduce debt. The scheme pays off the loan in 3-5 years.

Community banks and credit unions: The rules allow local banks and credit unions to offer smaller loans on easier repayment terms than larger regional or national banks. Call or visit to compare interest rates, which can be as low as 10%-12% compared to 400%-500% rates on payday loans.

Peer-to-peer lending: If you're still having trouble finding a source of money, go online and check out peer-to-peer lending sites. Interest rates can be as close as 6% to 35% for those who get great credit, but 35% is still a lot better than 391% from a payday lender.

Local Charities and Churches: If you've hit the road, there are a surprising number of charities and churches willing to offer assistance at no cost. Organizations such as the United Way, the Salvation Army and church-sponsored ministries such as the St. Vincent de Paul Society often step in when you only need a few hundred dollars to get through a tough stretch.

Debt Settlement: If trying to reconcile unsecured debt (credit cards, hospital bills, personal loans) has always caused you to run out of money, you can choose debt settlement as a debt-relief option. Huh. Debt settlement means negotiating to pay less than you owe, but it also comes with a big stain on your credit report and a heavy cost on your credit score.

 

Frequently Asked Questions (FAQ)

1. How do I get a payday loan?

You can apply for a payday loan at any storefront payday lender or online. Most lenders only require proof of income and a bank account. You must be 18 years old and show ID.

 

2. Why are payday loans bad?

Payday loans are expensive and can easily create a cycle of debt. Due to the high interest rate, many people end up with more than the amount originally borrowed.

3. Who can make a payday loan?

Storefront Lender, Check Casher, pawn shops, Credit Union, Bank, Online Lender

 

4. How are payday loans different from other loans?

You do not get approval for a payday loan based on any credit check as a standard loan. Payday loans do not show up on a credit report. They may not improve your credit if you pay off the loan on time. Payday loans can only hurt your credit rating if you fall behind. The lender can

• Refer to your account for collection.

• Report you to the credit-reporting agency.

 

5. How does a Payday Loan Affect Your Credit?

Payday loan companies usually don't check your credit or report it to credit bureaus, so if you take out a payday loan and pay it back as agreed, you may not notice any change in your credit score.

However, if you are unable to comply with the terms of the loan and stop paying your loan, the lender may hand over your account to a collection agency, and that account will likely appear on your credit report and on your credit score. will have a negative effect.


Also see  What are the types of loans for bad credit?

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