Sometimes, there is no shame in admitting that you may be short of cash and you need access to money to meet important expenses. A lot of people go for payday loans when they need some extra money right away to pay off necessary expenditures. While a payback loan seems like a convenient and viable option, you need to be a little careful not to get carried away. The thing about payday loans is that their fees and interest rates can make them a pretty expensive option. If you are not in the best possible financial circumstances, you might not be able to pay the debt on time and that can drastically increase your financial burden.

While we are not saying that you should not consider seeking payday loans entirely, there are some things you need to know about them. Understanding how payday loans work properly will help you make the right decision about them.

How Payday Loans Work

According to the National Conference of State Legislature, payday lending is allowed in 37 states in the country. A payday loan essentially allowsa loan applicant to take the amount of their upcoming paycheck in advance in the form of cash. The amount you take as a loan is not that much, while the time you have to repay the loan is short as well. So, qualifying for a payday loan is easy.

In order to apply for the loan, you can do it either online or visit a store that offers them. The maximum amount you can borrow depends on the state you live in. But, payday loans of up to $500 are common. Also, you need to be an adult, have a valid ID, show proof of your income, a phone number and a checking account to collect the loan.

If you decide to go to a payday loan store, you need to write a personal check to the business for the amount you will borrow and the fees you need to pay for it. Online and on-the-phone applications require you to give the lender the authority to debit the amount from your account. You can also use your debit card to apply for a payday loan (just in case you were worried about that). You can read more about it to find out how.

The lender will deduct the amount from your account and include the fees for the amount borrowed. The fees can range from $15 to $30 for every $100 you borrow.

The loan terms are usually from two to four weeks. If you pay it all back on time, you are good to go, but if you don’t, you may have the option to extend the loan.

Some states also allow lenders to renew payday loans. They allow borrowers to pay just the fee balance and extend the due date.But, they charge another fee for that.For example, if you borrowed $200 and the fee is $30, you can extend the loan period by paying $30 plus an additional $30 to get more time to pay the $200 back. Essentially, you will be paying the lender $260 instead of the $230 you initially owed with the fees.

Why Payday Loans are Not the Best Idea

Considering how much this can cost you just for the fees is alarming in itself. If you think of all the fees charged on loan as an annual percentage rate, you will be quite shocked. Compare the interest rate and fees to the loan amount and then calculate it over the period of a year to find out the annual percentage rate of a payday loan.

Here’s a simple example to explain:

  • Principal Amount (the amount you borrowed): $800
  • Interest (the fees charged): $120
  • Repayment term (the time you need to pay it back in): 14 days
  1. Divide the interest by the principal amount: $120 / $800 = 0.15
  2. Multiply that by 365 (for the number of days in a year: 0.15 x 365 = 54.75
  3. Divide by the length of payment term: 54.75 / 14 = 3.91
  4. Convert this into an annual percentage rate by multiplying into 100: 0.391 x 100 = 391

The annual percentage rate for an $800 loan with a $120 fee is around 391 percent. Compare that to the interest of credit card users with a reasonable credit will get an annual percentage rating of around 20 to 25 percent.

There are other penalties that can be applied on the loan as well, which come with additional charges. These include a nonsufficient funds fee if you deposit a check, but don’t have the amount in your account.

When Are Payday Loans Helpful?

With that being said, payday loans are definitely helpful in some situations. That is the reason why they are there in the first place. For instance, if you need a bit of cash for a very short time and you are absolutely sure you can pay it off with your next paycheck, you should definitely go for it.

Payday loans are quite useful if you need to make a crucial payment. An upcoming rent payment when you’re at the end of the month or anything else. Maybe a pressing health concern and need the cash for immediate medical expenses? A payday loan can come in handy in situations like that.

There are rare occasions where you can use a payday loan to stave off a financial emergency, but you should never even think about doing it for an amount you cannot pay off after two weeks. Without having access to proper funds within the allotted time, a payday loan can turn from being a savior to an instant nightmare for you.

All you need to do is make sure that you adjust your budget and take the loan only when you are absolutely sure you can repay it with your upcoming paycheck. Payday loans are not reported to credit bureaus unless the issue is referred to collections, which can affect your credit score adversely. In a nutshell, apply for a payday loan when it’s absolutely necessary and you will find it to be very helpful indeed.

Pros and cons of payday loans

With increasing global demand for different products, the prices just keep getting higher than usual all the time. Not only are luxuries expensive but even the necessities are heavily taxed in most of the countries. It makes living conditions for lower-income groups burdensome to survive. If you’re ever suffering from a budget constraint you’ve probably thought of applying for a loan. Though it may temporarily solve your problems before applying for one you must understand and abide by all the conditions put forth by the lender. Failure to comprehend some of the terms may lead to you losing more than you anticipated.

You are probably aware of the term ‘Payday loans.’ If not, these loans are one of the fastest methods out there to receive instant cash if your expenses are going a little too heavy on your pocket. Payday loans work by you applying for an amount that is not more than the next paycheck you will receive basically, the lender provides you with just enough money that amounts to your monthly salary usually lent over a short span and requires you to pay back the lender by the time you receive your next paycheck, which shouldn’t take longer than a few weeks. This temporary loan does not help you to finance assets such as cars or land but instead, it is an immediate form of money, especially when you’re going through an emergency. Therefore, you must carefully assess the pros and cons this loan could possess and whether or not it is worth applying for.


#1 Nullify credit scores

Just like most loans often need you to provide information about your credit scores and your past credit history, payday loans tend to exclude this factor and pay no heed to your credit scores or how your previous performance has been in terms of lending and paying back the loans you’ve previously applied for. If your credit scores are not in good shape, it is less likely that your request for another loan will be approved, but in case of payday loans, lenders are more concerned with your ability to pay for the loan based on your recent pay scale.

#2 Instant form of receiving cash

A big plus payday loans have is the fact that you can receive the money in not more than 24 hours. The payday loan application process takes around 30 minutes and after your request for the loan has been approved, you don’t need to go around trying to arrange instant cash as its most likely that the cash will be available to you within a day. The application process isn’t too complicated and rarely involves paperwork. You can apply for Payday loans online at any time and you don’t need to wait an entire day before receiving your loan from the bank, in case it’s closed.

#3 Convenient

You can apply for payday loans from the comfort of your home at any time or day. All you have to do is fill the form and just take a decision. You don’t have to go through the hassle of meeting people and fulfilling requirements. You can either directly collect the check or even have the amount transferred to your bank account.


#1 Higher interest rates

Payday loans are a type of unsecured loan. Therefore, the rate of interest is generally higher compared to other short-term loans and facilities. Sometimes the overall amount tends to be so expensive that there is a good chance you might not be able to pay back the loan in time with the interest given. It can even be compared to credit card rates of borrowing.

#2 Not a solution to your financial crisis

The bitter truth about payday loans is that it makes you want more. You end up being caught up in a spiral of applying for one loan after another. And if the loan tends to be expensive or if you may seek difficulty in paying back on time the borrower often ends up applying for another loan to pay off the initial payday loan. This leads to a severe debt crisis for you in the long run.

#3 Less transparency

In most places, there are not yet enough laws that have been passed out to protect consumer interests. Payday loans are sometimes exposed to fraud due to unregulated rates of lending. Payday loan organizations tend to set out their own set of rules and you may come across ghost companies or brokers that take advantage of your financial situation and add even more to the already high-interest rates.

Payday loans require paying back for everything in one hefty amount with no ease of installments, in case you miss the repayment date or are not able to pay back your loan, you may end up paying up for more than you expected and at worst cases you could even be sued by the lender.

The Final Word

You must consider all the terms involved when it comes to applying for a payday loan. Usually, it is not recommended and based on past consumer experiences, the disadvantages outweigh the positives. It is generally not worth the risk and should never be considered as a financial resort in the case of funding a luxury or anything that has to involve your leisure. Look out for hidden fees before you apply for the loan. It’s best to seek advice from anyone who may have any experience with loans as delicate as this one.

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