How Payday Loans Work?
Before applying for anything, you must completely understand the details to ensure that you do not face financial difficulties later on. You never buy a car without first checking the price, test driving the car, and reading reviews of other people. And the same is true when applying for a loan such as a payday loan.
How does payday loan work? Who should apply for the loan? What’s the application process? And how quickly can you obtain the loan? This article will answer all the important questions relating to payday loans so that you will have an easy time making an informed decision.
Payday Loans: An Introduction
Payday loans are a type of short-term loan. The loan is typically of $500 or less and is repaid on the next payday. There are three main features of payday loans that you must remember.
- It is a short term loan
- It becomes due on your next payday
- It does not require a high credit score or a collateral
The lender takes on a risk by offering the unsecured loan to individual with a low credit score. In order to reduce the risk, the lender typically charges a high rate on the loan. For a two-week payday loan, the average annual rate is about 400%. This equates to about $15 per $100. The rate includes both interest rate and service charges that are fixed by the payday loan lender.
Lenders structure the payday loan in different ways. Some allow the borrower to make the payment in lump-sum while others allow payment in installment in the form of rollovers or renewals. The longer the period of the loan the greater is the cost of the loan. In some cases, the cost of the loan doubles the actual loan amount. This may happen if the loan amount is renewed over a longer period.
Also, some lenders require that you give them the bank account number when submitting the loan application.
When the amount becomes due it will automatically be debited from the account. In other cases, the lender would require you to issue a post dated check. The lender will cash in the check when the loan amount becomes due.
Lastly, the state laws influence the rate and other costs charged by the lenders. Most of the states have put a cap on the amount that can be charged by the lender. The state laws dictate the maximum (and minimum) period of the loan, the maximum APR, rollover limit, and other rules regarding the payday loan. There are even certain states that prohibit payday loan lending to the consumers.
How to Apply for a Payday Loan
You can apply for a payday loan by submitting an application online. You may need to fill certain information such as your contact details, employment details, and other similar information. Once the application is made, the lender will process the application and transfer the amount in your account within 48 hours if you fulfill the requirements.