Payday Loans Infographic- How They Work
A Payday loan refers to a short-term borrowing activity where a lender charges high-interest credit based on your income. Generally, a loan lender will look into your monthly earnings to set the loan and interest.
Who can apply?
Almost anyone with a driver’s license, proof of income, and a bank account are eligible to apply for a loan. However, some loan lenders might have additional regulations when you don’t meet their criteria to get one.
How it works
You should provide your personal information to apply for a payday loan, as mentioned in the previous point. Usually, you also have to provide pay stubs when using one.
Pay stubs show your current income level and can be obtained from your employer. To finalize the process, the borrower writes a check (or authorized an electric debit) for the loan amount and the loan fee.
When everything is set and agreed upon, the lender hands over the borrowed cash, and the lender takes money from the borrower’s bank account on the loan’s due date every month.
Cost
Payday loans require borrowers to pay high-interest levels, approximately 780% in annual percentage rate (APR). If you borrow $200 for 14 days, you will probably pay between $23 and $76 on each due date.
As many as 12 million US citizens take out loans each year worth an average of at least $375 and pay $520 interest each. However, usually, a borrower is indebted for five months a year.
Statistics on typical APR in 2016 show that payday loans come up with the highest number, 300-1.500%. Most borrowers use the loan to cover everyday expenses, such as utilities, credit card payments, rent or mortgage, food, and emergency needs.
Alternatives to Payday Loans
You can try these alternatives if you’ve taken a payday loan and faced hard times fulfilling the due date payment.
- Negotiation with a creditor or utility company for extended payment terms.
- Pawn loans, where the lender keeps your pawned item, and you owe nothing further.
However, if you haven’t taken any payday loans, you can consider other alternatives that won’t overburden your finances, such as:
- Credit union loan that offers up to $1.000 each on a six-month loan at competitive rates.
- Credit cards are way better than payday loans.
- Pay advance from employer
- 401(k) loan, but you have to understand the risks and tax implications before applying to one
- A loan from family or friends and offer them interest.
Conclusion
Taking a payday loan has a high chance of overcoming financial problems. To avoid yourself trapped in a significant sum of interest, you have to pay your loan bill on time.
You can try to negotiate or pawn loans if you’re facing difficulties in paying your loan. Or, consider much safer and less burdensome options to avoid payday loans.
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