What Are Payday Loans and How Do They Work?

Payday loans are helpful little unsecured loans that are repaid on your next payday. Hence the name payday loan. However, these loans aren’t for the faint of heart. They can often seem like a tempting and quick way to get quick cash.

However, more often than not, there are hidden fees and high rates that can trap you in debt. Payday loans can be a great option as long as you’re smart and careful. It is important that you know what you will get and what is expected in return.

Here is what you need to know about payday loans and how they work.

What Are Payday Loans?

Generally, payday loans are unsecured loans of $500 or less that must be repaid by your next payday. They are often a last attempt for money for borrowers who have bad credit and have no other options. These loans usually harbour a much higher interest rate than traditional loans.

They also attract far higher fees. A direct lender won’t usually run a credit check. So, if a lender is not interested in your credit score, you may be dealing with a payday lender.

How Do Payday Loans Work?

Usually, Payday loans can be obtained through an online application process or a brick-and-mortar location. Your payday lender may request a hard credit check to see what your credit score is. However, when it comes to payday loans, direct lenders usually aren’t interested in your credit score.

You will most likely have to provide proof of income and your pay date to ensure the loan is repaid. Repaying the loan isn’t a one size fits all process. Sometimes, you can give the lender a post-dated check that can be deposited on your next payday.

You can also authorize the lender to take the funds from your account once you’ve been paid. You must also know that payday lenders will not typically charge traditional interest rates. They calculate fees to borrow and add them to the balance to be repaid.

In some circumstances, a lender may offer you a rollover if you can’t afford the payment when your payday rolls around. A rollover allows you to only pay the initial borrowing fee until your next payday. These fees can rapidly pile up. That is why some people say it is hard to get out of the payday loan debt cycle.

The Bottom Line

Applying for payday credit online can be very beneficial under the correct circumstances. If your financial history is healthy but you just need cash, a payday loan is typically a good option. Just remember that they can come with risks.

Before applying for a payday loan, speak with banks and unions about your other options. There are other options to be aware of, but sometimes other options simply do not suit your current situation. If a payday loan is something you think you need, find a reputable lender for a seamless and trustworthy process.

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