How Do Payday Loans Work (and How Do I Break the Cycle)?
Chances are, you’ve heard of payday loans before. Advertisements promoting these loans are everywhere, but do you know what they actually entail?
A payday loan – also known as payday advances, cash advance loans, check advance loans, deferred deposit loans, and post-dated check loans – is a loan that helps you with any short-term financial needs that you may have.
How it works is that after getting some of your personal information, you’re required to write a check to the lender for the amount you would like to borrow. You are then charged a fee, and the lender will deposit the agreed upon amount into your account, or give you a cheque for the amount. The lender will then later cash your cheque or debits your bank account on the agreed upon date of repayment.
So, for example, let’s say a pipe in your bathroom burst and you needed to hire a plumber to deal with the situation. But you had just paid your rent and some bills off, and you don’t get paid for another few weeks.
This is where a payday loan comes in handy because they offer modest sums – usually a few hundred dollars – the day you need it. Another positive is that they do not look at your credit. So, whether you have poor or great credit, you can still get approved. This is one of the major draws for many borrowers.
But there are huge caveats to this seemingly harmless convenience. Not only do most financial institutions that offer payday loans charge high processing fees (some institutions charge $15 per $100 borrowed), but they also carry very high interest rates, with some as high as 600%. (For comparison sake, annual percentage rates for credit cards range between 9% to 30%, and the APRs for personal loans are generally even lower than that of credit cards.)
Needless to say, if you don’t repay the loan within the set period (usually 14 days), you will be charged additional fees. Finally, if your cheque bounces or there isn’t enough money in your bank account to be debited, your bank will charge you additional fees.
Such institutions may be beneficial for those who don’t have credit cards, any savings, and/or poor credit, but it is of the utmost importance that payday loans are paid back as soon as possible. Since they generally charge sensationally high interest rates, it’s easy for those who fail to repay the loan at the end of the term spiral into a deeper and deeper debt. When applying for a loan or other credit related products, financial institutions will see your history of payday loans on your banking records. This signals a flag to financial institutions as a concerning risk.
Of course, there are ways to avoid payday loans, as this should really be your last resort under emergency situations. For starters, it’s always important to keep a sum of money aside in your savings account for such purposes. Some banks require a minimum balance from their clients, and ensuring that you maintain that minimum balance can be a good trick to ensure that you have an emergency fund.
Putting the charge on your credit card instead can provide you a bit of time before you have to pay off the debt. Inquiring about your bank’s overdraft protections (in the event that you do not have enough money to repay the payday loan institution and they debit your account) can also save you some money.
The most important thing, though, is that if you have evaluated all your options and you decide that a payday loan is the way to go, ensure that you understand all of the costs, terms, and fine print before you apply. Be sure to borrow only as much as you can pay back with your next payday, and make paying back the loan your main priority the moment you get paid.
In the event that you’re having trouble managing your finances and maintaining a positive credit score, urLoan can help you rebuild your credit and regain financial health sooner through our loans. Our approvals are based on employment and verifiable income, unlike any other traditional means of credit score used by such institutions as banks, or taking security on your assets.
- What are the Differences Between Payday Loans and Personal Loans?
- Several New Lending Scams affecting Canadians