Payday loans are quite tempting to everyone. For example, what would you do if you had an important bill to pay and were $300 short? Your payday isn’t for another ten days, you have maxed out your credit card, and you can’t or don’t want to borrow from family and friends. What are you going to do?
The answer isn’t as straightforward as you may think because there aren’t many options available. You are likely going to use a payday loan to bridge that gap between the money you need and when you get paid, but it could get you deeper into debt.
Your first step is to find out what a payday loan is and how it works. Then, you can find out how to get the best online payday loans.
How Does a Payday Loan Work?
When you obtain a payday loan, you ultimately use your paycheck as collateral against the amount of money you borrow. Applying for one is often easier than a traditional loan because you don’t need good credit or any history at all. The lender primarily looks to make sure you have a steady income. Most lenders require that you have the payment automatically withdrawn from your account. This means on the appointed day, the money is taken from your paycheck to pay back the loan. That can minimize the risk to lenders.
If you go directly to the lender, it might allow you to provide a postdated check for the amount of the loan plus interest. Then, the check is deposited when you get your paycheck. However, going online means that you allow the lender to automatically withdraw the funds from your checking account when you’ve been paid.
The Risks Associated with Payday Loans
Some people believe that good reasons for online payday loans don’t exist, but there are times where it makes sense. You can get some great terms, but it is up to you to shop around. Of course, it is also important to understand the risks of payday loans so that you are prepared and can ensure that you don’t fall into the trap of recurring debt.
Payday loans are more accessible than a cash advance from a credit card or personal loan, so they can seem like they are too good to be true. If you aren’t careful, they can cause significant issues, such as lowering your credit score.
Being short on cash often makes you desperate, so you take out the payday loan without thinking about repaying it. You know that it is going to come out of your next check, but that is in the future. However, the money you earn is likely going to be needed to cover other expenses. To offset this, you can set money aside to pay the loan back.
There is a thing called rolling over the loan. If you can’t repay your full loan amount, it’s possible to roll it over into another loan. However, interest still accrues, which makes it harder and harder to pay off the full debt. Plus, the lender can add late fees to the final amount because you didn’t pay it all off on the specified date.
It’s quite difficult to get out of that cycle once you’re in it. Therefore, when you take out the payday loan, you need to ensure that there is a plan in place to pay it off quickly. Those who have larger paychecks may not have as much of an issue. They can set aside the funds they need to repay the loan soon. Also, you can offset the cycle of recurring debt by only taking out a loan for what you know you can repay. In other words, do not take out such a large sum that you cannot pay it back with your next paycheck and cover other bills.
How to Repay a Payday Loan
In most cases, a payday lender charges you a fee with every $100 that you borrow. This can range from $10 up to $30 and depends on where you live and which lender you choose. While the fees may not seem like a lot, they do add up. For example, a $15 fee is about equal to an APR of nearly 400 percent for an average two-week loan.
You must pay back the full loan amount plus the fee with your next paycheck. With a personal loan, you can usually make smaller payments over a longer period. That isn’t the case with a payday loan. It must be paid back when you get your paycheck; if you can’t do that, you can roll it over to the next payday. Just remember that you are going to have more fees with which to contend.
Let’s say that you borrow $100; with the lender’s fee of $15, you now owe $115. You get your paycheck two weeks later and realize you can’t pay it back. Therefore, you pay another $15 fee to roll over the loan. Now, you owe the same amount ($115) because you didn’t pay anything back on the principal and have a new fee and paid the first $15 fee.
If you keep repeating that cycle of rolling it over, you could end up owing much more than what you initially borrowed.
Do Payday Loans Affect Credit Scores/Reports?
Most payday lenders aren’t going to impact your scores much. These loans are smaller and are short-term, so most lenders aren’t going to make a hard inquiry on your report and score to ensure eligibility.
Often, payday loan payments aren’t reported to the three major credit bureaus. Therefore, if you pay the loan off in the time period provided, your score isn’t going to change.
However, payday loans can affect your credit score if you don’t pay them back. For example, if there aren’t sufficient funds in the account, the payment bounces. Your bank might close the account, sending you to collections. Those things are reported and can negatively affect your score.
Some lenders may also take you to court to collect on the unpaid debt. If you lose the case, that information is likely to be reflected in the credit report and could lower your score for seven years.
Choosing the Best Payday Loan
When you know that a payday loan is the right choice for you, it comes down to finding the best online payday loans. To do that, you need to know a few things.
The first step is to research payday lenders in your area. Yes, you are applying online, so you may not need to worry about the specific location. Use lenders that are credible and have been in the industry for at least ten years. They have established that they have the funds you need and do enough business to stay in the game.
Apply for three to four loans from various lenders. The documents and information you need to provide can vary. Once you are approved, you can decide which option is best for you. For example, you should compare interest rates and choose a lower option. Most of the time, it is going to be easier to repay your loan at a lower rate. Sometimes, you can negotiate with the lender, though this isn’t always possible.
Consider the repayment methods available to you. Most online payday lenders are going to require that you allow them to automatically withdraw funds from your account. This means providing them with the routing and account number. Therefore, you should ensure that the website is secure so that your information is protected.
In some cases, the lender provides the rates and fees on its website. This can make it much easier for you to find out what it is going to cost on top of the amount you need to borrow. Simple math can tell you the full price you are going to pay.
What You Need to Get a Payday Loan
Often, you aren’t going to need a high credit score to get a loan. While some lenders vary, most of them require you to have a:
- Social security number
- Identification (government-issued)
- Proof of income
- Valid email address
- Active checking account
When Are You Approved?
If you apply online, you can get approved in minutes. However, it could take a few days to get the money deposited into your account. Just know that it is going to be automatically added, so you need to make sure that the information you provide is accurate.
Advantages of Borrowing Online
Applying for a payday loan online is highly beneficial for many reasons. Of course, you get faster approval because the lender tells you almost instantly if you are approved and for how much. Traditional lenders are different. While you can fill out the application online, it can take days to get an answer because someone from the institution has to review your application. Sometimes, you are required to go to the branch in person to finish the transaction, which doesn’t happen with a payday lender.
You may also get decent rates, though it does require some research on your part. Online lenders may charge less, especially if they don’t have a physical location. They don’t have to pay overhead and have fewer regulations with which to deal. Those savings might be passed down to you.
When to Apply
There is no wrong time to apply for an online payday loan because you can do so any time of day. Some people worry that buying a house isn’t the best time to get a short-term loan, but it might not matter. For one, the loan isn’t going to be reported to the credit bureaus, so it isn’t going to affect your mortgage rates and ability to get the loan. Also, it could help you cover expenses while you’re trying to cut down your debt.
The best online payday loans are those that come from reputable lenders. You should always focus on getting the best terms and may find it easier to get the money you need because there are fewer rules and restrictions. Still, it is important to be cautious about these types of loans because they have shorter repayment terms and can cause you to get into a recurring cycle of debt if you aren’t careful.