A payday loan carries high interest but doesn’t demand collateral. It is a type of unsecured personal loan.
By Gorica Gligorijevic
Personal loans and payday loans are among the most popular debt products, one is riskier, so is payday loan riskier than a personal loan, for example? There are some things you have to know before deciding which one to take.
How does a payday loan work?
Payday loans are short-term loans and unsecured. You find them under names the check loans and cash advance. The borrower can get fast and easy access to between $300 and $1.000 in cash. If you take this kind of loans you’ll be obliged to pay it back with a high-interest rate.
A payday loan is high-cost, and you’ll have to repay it with your next paycheck. To get a payday loan you’ll need to give a confirmation of your income to the lender. Also, the lender will check your account. The good thing with payday loans is that you’ll receive the cash in less than half of an hour, or if you applied online it will be available in less than 24 hours.
In exchange, the lender will demand some guarantees, for example, the lender will ask you to sign a permission to withdraw money directly from your bank account. Such will do it after your next payday, usually two weeks or one month later.
If you made an appointment at a store, and you take a payday loan there, the lender will tell you when to come again and repay. It can happen that you miss the appointment and the lender will withdraw that amount from your bank account using the permission you gave it or by running your check if you deposited it. The amount will be increased by interest.
Online lenders will launch automated withdrawal.
Is payday loan riskier than personal loans?
Payday loans are useful but that help comes with more cost. The charges can vary from 15% to 30% of the amount you want to borrow. Expressed in annual percentage rate (APR) on the loan it easily can be the triple-digit number. No matter if you have that loan for, let’s say, two weeks, you’ll have to pay much higher interest than it would be for a personal loan.
Payday loans are risky and they are chosen by borrowers who may not have cash or other alternatives easily available.
Maybe one of the most dangerous situations with payday loans is to fall into a series of repeatedly extending the loan. If you find yourself in such a situation you could end up unable to repay it. For example, if you cannot repay this kind of loan on payday, you may ask to extend the loan repayment period.
And what will happen? You’ll continue to spend the money you borrowed, but interest rates and other fees will continue to accumulate more and more. At some point in time, you’ll find yourself unable to repay it. You’ll enter a vicious cycle, which is a very dangerous situation because there is no limit on how many times you can get a payday loan.
With personal loans, you don’t have such a situation. Can you see now why do we have the question in the title of this article: Is payday loan riskier than a personal loan?
How much you’ll have to repay for it?
The federal Consumer Financial Protection Bureau made research that showed that the costs of payday loans are $15 for every $100 borrowed. It isn’t a cheap loan, you have to understand. For example, if you take a payday loan for two weeks you’ll need to pay over 390% of the annual percentage rate.
More expensive will be with online payday lenders. They usually charge higher rates, their median payday loan cost is almost $24 per every $100 borrowed, according to the federal Consumer Financial Protection Bureau. That means an APR is over 610%.
Moreover, if you miss repaying the loan in full, you’ll be faced with additional finance charges and the whole cycle will repeat. Several months later, you’ll have more interest to pay, more than the initial loan value was.
Is payday loan riskier than a personal loan?
Of course, it is. The real danger is to fall into a cycle of debt. It could cost you a lot to get out.
The amount you can borrow differs by state’s laws. The states that allow payday loans top the amounts between $300 and $1,000. Here are details for the US residents.
What will you need to apply for this loan?
To apply for a payday loan you’ll need a bank account, some ID, and proof of regular income, such as a pay stub, for example. And, of course, you have to be over 18. Even you have all of this, you can be rejected. Here are the possible reasons. For example, your income can be insufficient since the lenders regularly expect at least $500 net income per month. Also, you could be rejected due to the state’s regulations like lows that can limit how much of the income is allowed to spend. Lenders will calculate the possible risk if you cannot repay on time.
Also, if you have some other loans can be a problem, for example, an outstanding loan. Lenders will know that even if you don’t want them to know because they use the services for tracking loans in real-time. The other reason to be rejected when applying for a payday loan could be if you have recently bounced checks or bankruptcy. Even if you are not employed long enough or you opened a bank account recently, you can be rejected. And one important thing, if you are an active member of the military, you’ll be faced with limitations. Federal law restricts payday lenders at more than 36% APR to active-duty military. Some lenders will eliminate you as a customer.
A better solution than a payday loan
Instead, try to create a budget sufficient for your expenses. Avoid needless expenses and focus on your emergency savings fund that you can use when you are short in cash.
Building savings will take you time, that’s true. Also, there are other ways to cover an insufficient amount of money. You may ask to be paid ahead of your paycheck. Or maybe your employer has some kind of emergency fund for employees that is without additional fees.
One of the possibilities is Payday Alternative Loans or PALs. That could be suitable even if you have a bad credit score. This method is commonly financed by local communities or could be some online loan. In other words, a payday loan should be the last option. Maybe it is hard to believe, but a pawnshop loan is more favorable than a payday loan. You can get cash for your jewelry or other things of value. The worst thing you may experience is to stay without your value things if you don’t pay on time. Anyway, it is a better option than getting an unsecured payday loan. At least you won’t be caught in extreme fees that could drive you to a risky debt cycle. Is payday loan riskier? In short, yes. And it’s riskier than other types of loans.