If you are in urgent need for money, but are not eligible for a personal loan, you can consider getting a payday loan. It is a short-term small loan. Once you receive your next paycheck, it will usually be repaid within two to four weeks after the loan is drawn. Payday loans usually have a small loan limit, usually up to $500, and do not require a credit check. Although for many people, they may be easy to obtain, long after you borrow money, they may become expensive and harmful to you.
How it works
You can obtain a payday loan online or in person (if available in your state). For many payday loan lenders, no credit check is involved. This is tempting for borrowers who do not have good credit (or any credit) and need fast cash. After completing the application, you will write a deferred check for your borrowed amount (including fees and interest) to ensure that the lender is paid before the next payday. If you are unable to repay the loan before the due date, some lenders can choose to extend the due date, but this will incur additional fees and interest.
The dangers involved
Payday loan lenders feed on the most vulnerable groups: those who desperately need funds but do not have a good credit history can borrow from banks, credit unions, and online lenders. Because lenders sell direct funds into your account without a credit check, many borrowers who don’t need to borrow a lot of money turn their attention to payday loans. But predatory lenders are so ubiquitous that some states do not allow payday loans. Most states regulate payday loans, including repayment periods, financial expenses and loan amounts. Even with regulations, interest rates can reach 400%. On the contrary, the personal loan interest rate may be as high as 36%, which is aimed at borrowers with extremely low credit scores or limited credit history.
One big danger of payday loans is the repayment period. Traditional personal loans, even small loans, can allow you to pay off the loan within a few months. Besides, payday loans require you to repay the loan any time 14 to 31 days after you take out the loan. Many borrowers do not have enough funds to repay the loan during this period. In some cases, they will eventually borrow more money to repay the loan and additional financing costs.
For many lenders, you set up a repayment when you borrow money. Normally, you will repay the loan with an overdue check, which includes the entire amount you borrowed and any fees and interest. However, you can also pay directly online or through a bank account. The repayment date is usually between 14 and 31 days before your next payday. Compared with a personal loan, this loan can be repaid in installments, while a personal loan can be repaid in installments for a certain number of months. Personal loan lenders will look at your income to make sure you can afford the money you borrow and that the monthly repayments are within your budget.