Understanding Payday Loans
April 23, 2021 by MoneyKey
Nobody wants to be in a position where they owe more than they can afford. However, unexpected obstacles can arise more often than we’d like. Whether it’s unanticipated medical issues and related expenses or a sudden emergency in the family, the moral of the story remains the same: life happens, and it can very quickly become financially overwhelming.
When there’s an emergency expense and you don’t have the resources to take care of it, you need to start looking for options. For some, that might be a cash advance on a credit card. For others, it might involve going to a relative or friend to borrow cash.
The next place to turn for many is Google, where a quick search of “cash loans” or “cash advance loans” immediately generates results for literally hundreds of different online direct lenders and other loan services, many of them offering things like payday loans online or different types of online installment loans, or both!
With so many alternatives out there, it may be difficult to navigate the options and determine what kind of loan makes sense for you. Equally important, once you decide what type of loan is suitable, you need to figure out which financial institution you should turn to. Below are examples of some options available, as well as some tips on what to look for in choosing a lender that is right for you.
What is a Payday Loan?
Payday loans are short-term loans that you pay back with your next paycheck. They consist of a relatively small amount of money, lent to a person looking for immediate access to some extra cash. A payday loan typically charges a high rate of interest, with terms that require repayment on your next pay date.
They can be used to access the extra money you need when you are in a financial bind if you don’t have funds available currently but can’t wait for your next paycheck.
Payday loans can be useful for those who may need immediate financing, however it’s important to remember that this is not free money. When you apply for a payday loan, you should consider the amount of interest and/or fees that you will be charged, and you should always only borrow what you can afford to pay back with your next paycheck. You should also bear in mind that once the repayment of the loan is accounted for, you will have less of your next paycheck available to you, so it’s critical to budget accordingly.
How and Where Can You get a Payday Loan?
You can apply for payday loans online or at a storefront lender. For some lenders, you may meet most eligibility criteria for a payday loan if you have a physical address, a source of income and a bank account. One important factor to note of a payday loan, assuming it’s unsecured, is that it’s not tied to any of your assets, it’s simply a loan that can help you to get out of a bind.
What is the Difference Between Payday Loans Online and In-Store?
If you don’t want to commute to a physical store, or if there isn’t a store nearby, then online payday loans may be the more convenient option.
Online payday loans may help you avoid some of the hassles associated with retail store payday loans. With online loans, you can apply from anywhere you get internet. This means that you don’t need to travel to a specific location, and you don’t need to plan around a store’s business hours. Applications for online loans are also generally a relatively quick process.
However, some people are still more comfortable going into a store and speaking with someone directly, especially when it involves borrowing money. This approach is particularly helpful to those borrowing for the first time and/or those that would like to speak to someone face-to-face before agreeing to a loan.
That said, many online loan companies offer virtual assistance via online chat and/or provide a phone number you can call to get additional information, making the experience that much quicker and easier, even when you are applying from the comfort of your own home.
What to Look for When Researching Payday Loan Lenders
Before you apply for a payday loan, you should research your potential options. To protect your rights, make sure the lender is licensed. Do not apply for a loan unless the lender asserts that they are state-licensed and follow all applicable laws. They should also display their authority to operate whether that be on their website, in their storefront, or both, depending on how they operate.
Beyond that, check out the reputation of the lender to ensure you’re comfortable borrowing from them. There are plenty of companies that do business as direct payday lenders but are not state-licensed, and therefore not compliant with state-level consumer protection laws.
How does a Payday Loan compare to an Installment Loan?
Installment loans differ from payday loans because the repayment schedule is made up of a set number of scheduled payments to be paid back over a specific period of time, with interest and/or fees. Some people may prefer a longer repayment period which spreads the cost of the loan over a relatively greater amount of time while others may prefer to repay the loan right away.
Even if you borrow in the form of an installment loan, if you’re looking to pay off the loan sooner, some financial institutions allow for early repayment or additional payments on top of your scheduled installments without a penalty. That being said, be sure to check the terms and conditions prior to signing a loan agreement as some lenders may impose a penalty if you pay off your installment loan earlier than scheduled.
When and How to use Short-term Installment Loans
Similar to payday loans, some types of installment loans may be more suitable for short-term, unforeseen emergency expenses, such as medical expenses, an unanticipated home or car repair, or even an unexpected trip to visit an ill friend or a loved one.
One caveat that applies to both installment and payday loans: do your research to ensure you know who you’re borrowing from, what the terms of your loan are and what the potential consequences are of not paying back the loan on time.
Additional Options – What to do When You Need a Little More Cash
There may be additional options available for those who are looking to borrow money. Most of the following are situation-dependent, meaning they may not be available to everyone, but they can be viable options for those who have access to them.
1. Applying for a Personal Line of Credit
A line of credit differs from a loan because it allows you to have more control over your cash flow. If you’re approved, it can give you access to the funds you need when you need them, up to your available credit limit.
You’ll pay interest and/or fees on the amount of money that you use, and you may also pay a fee for each withdrawal or advance you make on your line of credit, depending on the financial institution you’re working with. You can withdraw additional funds at any time so long as you have available credit on your line of credit and your account is in good standing.
2. Locking in Some Extra Income
This may include overtime if you’re paid hourly, or an extra part-time job if you’re on a salary. If a second job is a little too much commitment, you could also start a small side business where you could pick your hours. This could include sewing and selling pillows or teaching guitar in your free time. Either way, look for ways to use your skills for some extra money.
3. Taking a Credit Card Cash Advance
While payday loans are often considered to be cash advance loans, there are other types of cash advances that you may be able to leverage. Specifically, you may want to look into a credit card cash advance. This will enable you to withdraw money from a bank machine with your credit card.
It’s important to note that the interest rates of this type of cash advance will likely be higher than those you’d see on regular credit card purchases. They may even come with additional fees.
Another important factor to remember is that when you take a cash advance like this, it’ll generally start to accrue interest immediately. This is different from regular purchases on your credit card, where there’s a grace period from when you initially make the purchase and when interest begins to build up.
Understand How Payday Loans Work Before You Apply for One
Dealing with an emergency expense is rarely easy, so it’s good to know that if you’re in need of extra money to help you through the situation, there are potential options out there for you. Just remember that applying for a loan should always be taken seriously and approached with caution.
Payday loans may be used as a last resort when you’re in a financial emergency, but always remember that they’re expensive financial products. Make sure that you exhaust all of your options, and if you do end up wanting to apply for one, only do so if you’re sure you’ll be able to pay it back.