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A payday loan offers claims to help those living the proverbial paycheck-to-paycheck existence by providing borrowers with an advance on their salary. The deal could temporarily relieve those struggling with limited cash flow, but the costs associated with these loans might make them more expensive and problematic than the borrower realized initially.
Payday Loan Basics
A payday loan involves borrowing in advance of a paycheck. Someone earning $700 a week might request a loan for $500 based on the upcoming salary deposit. The person seeking the loan might not have good credit or suffers from maxed-out credit. Visiting a pawnshop is not something they can do, but they might find a payday lender that provides a fast option to receive cash. The lender does not worry about the would-be borrower’s credit because the person’s salary should cover the loan.
Payday Loan Requirements
Each payday lender has unique requirements, but some common rules are necessary to procure a payday loan. Lenders won’t enter into loan agreements with a minor. The potential borrower must prove their identity and be 18 years of age or older. A valid photo identification, such as a driver’s license, could suffice.
Of course, their claims about employment. Usually, the borrower must work at the job for a minimum of weeks. This way, the lender feels confident the person established themselves in the job and will not quit or get fired before the next paycheck arrives.
Borrowers will likely need a checking account. After all, the lender has to deposit the money somewhere. Most payday loan application processing occurs online, as many “brick-and-mortar” lending locations moved into the digital age.
Payday Loans and Costs
Payday loans come with interest rates so high that these arrangements might be the costliest loans available. The APR on a payday loan could be as high as 400%. Borrowers might feel shocked at the interest and fees they pay on a two-week loan. Those unable to pay the loan in full by the two-week due date may discover the costs become even higher.
Persons struggling financially might incur even more unexpected expenses during the two weeks before the due date. So, they might become unable to pay the loan and request an extension. Although the extension provides additional time to pay, the APR remains in place, and the loan’s cost increases. Interest and fees won’t go away with an extension.
Multiple Payday Loans Worries
If someone takes out a payday loan and cannot repay it on time, the person could face further financial strain, leading to taking out another payday loan with another service. Doing so might make a challenging situation even more difficult since the borrower would assume the financial costs of another expensive loan. Taking out multiple payday loans may be disastrous, but deciding to consolidate payday loans could deliver a solution. A consolidation loan might be far less costly and easier to manage.
Anyone who cannot repay a payday loan might find themselves facing aggressive debt collections. The balanced owed remains even if someone asserts their protections against unethical debt collections. Expect a credit score to suffer significantly after defaulting on a payday loan.
Looking Closer at a Financial Situation
Since payday loans can be so expensive, those relying on them may need to take time to determine why their financial situation leaves them reliant on such lenders. Perhaps addressing some reasons why cash flow is low and less-costly credit is elusive may deliver solutions.
If someone struggles with limited cash flow, then it might be wise to figure out ways to reduce a budget. Anyone who cannot make ends meet with one job might consider options for side work. Many gig economy apps could open doors for earning a “side hustle” that brings in extra income.
Figuring out ways to improve a credit score might be advisable. If a poor credit rating makes it difficult to procure more traditional means of borrowing, then working to improve the rating might need to be a priority.
Payday loans, like title loans, may seem like an easy way to access funds. However, the overall costs could bring added troubles for those attempting to repay them. Exploring other ways to deal with a difficult financial situation might help a borrower find another solution.