Payday Loans: Easy In, Onerous Out

Payday Loans

When a financial emergency arises, the majority of individuals would turn to their savings accounts or their credit cards to access money. However, for individuals with poor credit and no savings, it may seem as if they only have one, costly option; payday loans. These loans are very easy to obtain but can be very difficult to get out of. This is because payday loan lenders don’t verify your credit history, score or worthiness. Instead, they simply verify your income to determine your ability to repay the loan, and proof of a verified bank account which the funds will be directly deposited into. While these loans can be quite helpful for those who promptly need cash, it may also be a good way to get trapped into serious debt if borrowers are unable to repay the loan on time. 

Simply put, a payday loan is a very short term loan, typically for $600 or less, that is generally due on your next payday. You don’t need good credit, a down payment, or to fill out time-consuming paperwork. Instead, you just need a reliable source of income and a verified bank account. In order to get one of these loans or apply for one online in a matter of minutes. 

Once the loan is approved, the funds will be automatically deposited your verified bank account. Additionally, lenders will demand that you write out a postdated payment check for both the entire loan amount, as well as the non-negotiable interest rate. This check guarantees to the lender that they will receive their payment on time. 

Once you receive a paycheck, the lenders will require that you have it directly deposited into the verified bank account that the loan was deposited into. This payroll or deposited paycheck will then coincide with the postdated check, guaranteeing that the postdated check will clear your account. Simply put, you take out a loan until your next payday, hence the name payday loan. 

When you agree to borrow this type of loan, you are agreeing to repay it in a single payment on your next payday, generally within two to four weeks, or when you receive income from another source such as Social Security or a pension. The specific loan-payment due date is set and agreed upon in the loan agreement.

Loan Costs: 
The majority of states set limits to the maximum amount of interest a lender can legally charge you. Typically, lenders charge an average of 400% APR, or annual percentage rate. To put this into perspective, credit card companies charge their customers an average of 10-15 percent annually. 

This is a costly part of these loans. Not only is the interest rate ridiculously high, but it can be very easy to get trapped in these loans. This is because their interest rate is typically charged every two weeks, or whenever your next payday is. This means that if you are unable to make your payment on time, you will most likely need to borrow another similar loan to repay the original loan. This often leads to a serious amount of debt or simply a debt-trap. 

Many people would consider payday loans as absolute, last-resort means of money. However, some individuals with no credit history or any savings may not have a choice, unfortunately.