Payday Loans

It’s Tuesday morning and you’ve just learned that your car’s alternator has gone out. It’s going to cost $400 to get it replaced. The only problem is, you won’t have the money to pay the mechanic until next Friday when you get your next paycheck. It’s a catch-22. You need your car to get to work to earn the money it’s going to take to fix your car. If you don’t have access to credit and you have a poor credit score or maybe a bankruptcy on your credit history, it may seem like an impossible situation. Fortunately, you still have the option of a payday loan.

What is a payday loan?

A payday loan is a relatively small amount of money that is loaned at a high rate of interest for a short time period. Payday loans typically range from $100 to $1,000 but loans from $300 to $500 are the most typical. The fee for a payday loan is anywhere from $15 to $30 per $100 borrowed. Assuming a two week borrowing period, a 15 dollar fee per $100 equals an interest rate of 390% while a 30 dollar fee per $100 equals an interest rate of 780%.

How it works

The nice thing about payday loans is that they don’t require a credit check as with other lines of credit. To qualify for a payday loan, all you need is an open checking account in relatively good standing (not overdrawn), a steady income, and identification. Whether you have a lower credit score, no credit history, or a bankruptcy or foreclosure on your credit report, you can still be approved for a payday loan.

To receive your loan, you write a post-dated check made payable to the lender. The amount will equal the total you are borrowing plus the lending fee. The check will be dated for your next payday. To repay the loan, you can pay the lender cash on the day you receive your paycheck, allow the lender to cash the post-dated check that you gave them, or you can extend the loan by writing another post-dated check and paying the lending fee.

Is a payday loan right for you?

Something that discourages people from getting a payday loan is the relatively high interest rate. Because payday loans are made available to borrowers regardless of credit score and credit history, the interest rates are much higher than with other types of borrowing. Though an APR between 390 and 780% sounds astronomically high, remember that the loan is intended to be very short term, usually about two weeks, and the borrowed amount is usually between 300 and 500 dollars. Revisiting the hypothetical situation above, if you took out a payday loan of $400 to replace the alternator in your car so you can get to work at a lending fee of $15 per $100, you’d be paying just $60 in addition to repaying the $400 you borrowed. And while $60 in interest for a two week loan may seem like quite a lot, it’s a small price to pay if it allows you to keep your job.

Borrowing responsibly

Getting a payday loan isn’t without its risks. Because of the high cost of borrowing, many borrowers become caught it a debt cycle. When the payday loan, combined with the lending fee is repaid after their next paycheck, the borrower may not have enough left over to pay rent, utilities, or other bills and may be forced to take out another payday loan. Borrowers who live from payday loan to payday loan can pay hundreds or even thousands of dollars in lending fees in the course of a year. An alternative to getting another payday loan is getting an installment loan, which offers a longer repayment term and possibly a larger amount, while having similar approval requirements as payday loans.

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