Do You Really Need a Payday Loan?

When it comes to getting a payday loan, the more you know, the better off you'll be. They are short-term loans, and they are based on the borrower's employment pay cycle rather than collateral like a house or car. Some companies have borrowers issue post-dated personal checks made out to the lender for the amount of the loan, plus the finance charges. It is held until the next pay cycle and cashed to pay back the institution. Anymore, you don't have to actually sign a check over, but give electronic access to bank accounts to the lending institution. This ensures they get paid in full on time. Online instructions, brick-and-mortar institutions, pawn shops and check cashing services all offer short-term financing.

Oftentimes borrowers have three choices when it comes to paying back the loan. The most basic is to allow a post-dated check to be deposited at the bank. Some consumers might want to pay the loan back in cash and the lender will give back the post-dated check that was never deposited. And the last option is to only pay the finance charge to the lender, which thereby will roll the loan over for another pay period.

Depending on state maximums, borrowers can get a short-term financing for as little as $100 to as much as $1,000. The average term for the loan is two weeks, since that is usually when people get paid. The annual percentage rate (APR) on these short-term loans is high. They can cost over 450 percent APR. The shorter the loans term the higher the interest rate in most cases. Some short-term loans can reach up to 780 percent APR. Therefore, doing your research before utilizing this form of lending is mandatory.

If you have a credit card that you can get a cash advance on, it's wise to do that instead of getting a short-term loan. The interest rate on a cash advance won't be nearly as high as that of most of these quick fixes. A $300 cash advance on a credit card, if repaid the next month, would cost about $14, which is an annual interest rate of 57 percent. But, shorter term loans are generally for those people who don't have credit cards, so it is usually their only option.

Most people who don't have much credit available, or have bad credit, turn to these shorter term loans in times of crisis or emergency. All you need to get this type of financing is an open bank account in good standing, a steady job and identification. Lenders often don't do a credit check but they usually will make sure you can pay them back. The requirements, however, are a lot less stringent than most bank institutions. You are able to get the cash you need very quickly, which can help you in your time of need.

Many states have laws that limit how high the interest rate can be for this type of financing, but lenders are now operating as “credit services organizations” so that they don't have to follow these state laws. If you borrow from one of these types of lenders rather than an actual store, you might have to pay an even higher APR. These companies facilitate the lending for a bank, and sometimes if you go direct to the source you are able to get a better deal.

Payday loans do have some advantages despite the high APRs. For instance, the borrower can repair their fico scores if all payments are made on time and not in default. You may qualify for a lower APR if it is shown that payments are made in a timely fashion. And, they are useful in medical emergencies and other emergencies where money is needed. Unlike a car loan that must be used to buy a car or a home improvement loan that must be used on your house. Your financing can pay for whatever you choose.

The danger of utilizing this option is that people can get caught in a never-ending cycle of debt. When the time comes to reimburse back your lender you may need extra time, and if you continue to extend the debt you just rack up more and more fees. If someone can't pay the loan and the personal check is deposited with insufficient funds, they will also incur bounced check fees in addition to bounced check fees from the lender. As long as you make an informed decision prior to getting a payday loan you won't be caught up in the dangers. Do your research, find a reputable company, and think about your future.