Get the Facts Before You Borrow: Payday Loan 101
In the current economic climate, alternative means of obtaining
money to make ends meet are becoming increasingly necessary.
Some alternatives include borrowing money from
friends/relatives; cash advances from employers; pawning
personal effects and payday loans. Also known as a check/cash
advance loan or deferred deposit check loan, the payday loan is
the most popular among these. As payday loans grown in
popularity, more and more people want to know just what a payday
loan is, and if it is the right solution for their situation.
SO, WHAT IS A PAYDAY LOAN?
A payday loan is an unsecured, short-term loan of anywhere from
a few hundred dollars to as much as fifteen hundred dollars in
some instances. A borrower generally secures the loan by
post-dating a personal check for a specific amount of money to
be posted against their account on their next pay period. Payday
loans are designed to help out in situations when you need quick
cash to cover an unexpected bill or an emergency situation until
your cash comes through or is made available.
A payday loan is NOT a revolving line of credit. It is
short-term and that is a key factor in this type of loan. The
idea is to take out the loan to cover a small bump in the road
or to smooth out any rough financial edges until your next
payday. If you are thinking of the payday loan as way to repair
a much bigger financial problem, the advice is to STOP! A payday
loan can create bigger problems down the road when used as part
of an overall troubled cash flow situation.
SO, WHAT IS A PAYDAY LOAN?
The most important thing to remember about payday loans is that
they must be repaid on time in order to avoid paying insane fees
that could potentially equal or surpass the amount of the loan
itself! It is the renewing of the loan and failing to repay it
on time that can create a major financial dilemma for the
borrower.
Most loans have a repayment period of four to eighteen days
depending upon the terms negotiated with the lender. The
repayment schedule and the method of repayment is arranged at
the time the loan is disbursed. More often than not, the
borrower will agree to pay the loan in full with cash on or
before the due date. Additionally, some lenders may opt to
collect on the loan by depositing the borrower's post-dated
check against his/her bank account on a mutually agreed upon
date.
With payday loans, there is a fixed rate fee calculated into
repayment on each loan disbursed. The average rate is $15.00 to
$20.00 dollars per $100.00 dollars borrowed. Due to the nature
of the quick turn-around time of payday loans, the annual
percentage rate or (APR) is generally very high. It is not
uncommon for the (APR) to be 100%, 200% or even as high as 400%
in some cases.
If a borrower is unable to repay a loan at the scheduled time,
the lending institution may agree to rollover the loan allowing
more time for repayment. The drawback to rolling a loan over is
that additional fees are added to your account. For example, if
the fee to borrow $100.00 is $15.00 and the borrower rolled over
the loan three times, then the new fee would be $60.00. That is
the original $15.00 fee plus three times that fee itself added
to each $100.00 borrowed.
WHAT ARE THE REQUIREMENTS FOR A PAYDAY LOAN?
Generally, the only major requirement for a payday loan is that
you have a job. Your job is your assurance that you will be able
to repay the loan. It is expected that you will be receiving a
paycheck, and therefore, the money to cover the loan. Good
credit isn't necessary or even required for the payday loan to
be approved. The lending institution only wants to see that you
are employed and have a steady income. In essence, your job is
your collateral
Getting a payday loan is actually a simple procedure. You apply,
and if approved, sign paperwork that indicates your promise to
repay the loan on the lender's terms. Be sure to take the time
to carefully read the terms of the loan and do not be afraid to
ask questions about what those terms mean. Often, these kinds of
contracts are written in a legalized, financial jargon that is
not easily understood by the average consumer. BORROWER BEWARE!
If you feel the lender's representative is not able to fully
answer your questions, please say so! If the terms of the loan
are not clear to you, do not take the loan until you fully
understand them. Teachers always say that the only stupid
question is the one you don't ask. This is true! Again, if you
do not understand all the terms of the loan, do not sign
paperwork until those terms have been fully explained to you.
Otherwise, you are legally bound by those terms that could prove
disastrous for you if you fail to act in accordance with the
terms of the loan. We would like to think that everyone is above
board, but not all lenders are. Unfortunately, there are
unscrupulous lenders out there who intend to make a profit at
your expense. It has been noted by the NAACP and the Department
of Defense that payday loan offices have strategically opened
offices near military bases and in socio-economically
disenfranchised areas where the demographic is largely African
American and Hispanic. Many reputable financial institutions,
consumer groups, and civil organizations are doing all they can
to shut down payday loan offices, but their efforts to date have
been largely unsuccessful.
BORROW IF YOU NEED TO, BUT BE SMART ABOUT IT!
With the often strict guidelines used by reputable lenders, many
people are getting caught up in the cycle of payday loans
because of their immediate benefits. When emergencies occur and
cash is needed, payday loan companies offer fast, hassle free
cash. More often than not, most have no minimum credit
requirements and do not perform background checks. In most
cases, all that is needed to secure a payday loan is a recent
pay stub and proof of a checking account. In these regards,
payday loans and cash advances do offer consumers financial
options in emergencies. On the other hand, more and more people
are getting caught up in this vicious cycle of borrowing which
can lead to financial ruin. This is not good, especially
considering that the loan was probably taken out to avert a
financial disaster in the first place. With pros and cons like
these, it would seem that the best advice would be to borrow if
you absolutely must, but do so with extreme caution.
Being proactive is probably the best strategy or, as
conventional wisdom holds, "an ounce of prevention is better
than a pound of cure". Take an honest look at your family
finances and come up with creative ways to not have to borrow.
Consider trimming the fat out of your budget, pledging to save a
little money from each paycheck, and reducing credit card and
revolving debt.
A little effort on your part can make a huge difference not only
in your financial situation, but in your quality of life as
well. Nevertheless, if you must take out a payday loan, remember
the following key points:
● Payday loans are NOT revolving lines of credit ●
Repay your loan on time! ● Do not plan on rolling your
loan over. Plan, instead, to pay it off ● The only
'stupid' question is the one you don't ask ● Payday loans
have terms & conditions of repayment. Know and abide by them
● Payday loans can ruin your finances and jeopardize your
job if you are not careful ● An ounce of prevention is
better than a pound of cure