What are Payday Loans?
Payday loans are sometimes referred to as cash advances, and they are higher-interest, short term loans meant to provide immediate cash to hold a person over until their next paycheck. They cannot be compared to mortgage loans or even student loans in a way that they are meant to help consumers with short-term money issues. When a customer applies for a payday loan, they provide photo ID and proof of income (usually in the form of check stubs). Some payday loan outlets take a personal check that's been postdated, made out for the loan amount plus any fees. Then, the lender has the customer sign documents describing the loan's terms, interest rate, finance charges and late fees. When the customer signs the contract, they get their cash. In the ideal situation, the loan gets repaid when the customer draws their next paycheck, but if they cannot, the loan is rolled over or deferred.
Most financial experts discourage people from getting payday loans. Because of their short term, their APR can reach somewhere north of 500%. If the borrower pays the loan off by the time the postdated check has been cashed, a payday loan can be an expensive-but-ultimately affordable temporary source of cash. If the entire loan amount cannot be paid back, the borrower has to pay the entire balance plus high interest and late charges. If the loan rolls over three times, the interest and fees can easily equal the original loan amount. Most localities have no law limiting the amount of interest a payday loan outlet can charge.
While the terms and conditions that come with payday loans can seem heavy-handed, there are circumstances under which they are a viable option. A lot of people, especially these days, are living from one paycheck to the next, meaning that they have no savings and any expense can cause financial ruin. Finance experts suggest that people try to find other alternatives wherever possible, such as a credit extension or a promissory note. If you believe that a cash advance is your only option, try to borrow an amount that you can pay back out of your next paycheck.
Generally speaking, payday loans should only be used in cases of high financial need. Before you sign for a payday loan, be certain to read its conditions and terms carefully. If your check is returned unpaid, the lender will take all legal action necessary to recover their money. While payday loans can be a good way to cover a temporary budget gap, they aren't meant to be a long-term solution. If you're having trouble making ends meet, seek credit counseling.