In the last one year, with the pandemic and everything payday loans have become really popular for people to take care of their short-term financial needs. But before you go for one of these loans, it is important to understand what they are first.
Wherever payday loans are legal, they have been advertised a lot in the past few months. You must have seen or heard about them through radio, television or the internet. First things first, they are known by a few other names as well. These include cash advance loans, deferred deposit loans, postdated check loans and check advance loans.
If you hear any of these phrases understand that they are just fancy terms for a payday loan.
A payday loan or also casually referred to as a salary loan, small dollar loan or a cash advance is a type of short-term loan. The name comes from a practice where the person borrowing the money writes a cheque to the lender which is dated for the future. This gives the lender some sort of a guarantee that they can take the money from a future salary day of the borrower.
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This is turn allows a person to borrow small to medium amounts of capital without having any collateral or a good credit score. You can understand it this way, you are basically borrowing a part of your future salary from a lender which you will have to pay back with some interest.
The loan doesn’t always need to be attached to someone’s future salary slip. Most places which provide payday loans only need a proof that you have a valid employment somewhere for a certain period of time. Some places might have some extra checks to ensure that you are earning at least a 1,000$ each month before lending you the money.
One of the only drawbacks with these kinds of loans is the high interest rate attached to them. On an average you might have to pay an extra 400% annual rate, also known as the APR. But some places have put up limitations in the rate of interest that companies or lenders can charge from consumers.
WHY YOU MIGHT NEED A PAYDAY LOAN?
Just take the example of last year. During the pandemic a lot of people were low on savings. If during this time some emergency comes up, or something unexpected happens and you might be in need of quick cash then during these times payday loans come in handy. You might need the money only for a particular reason and if you are sure you can pay it back on time then the higher interest rates won’t really affect the decision.
One thing that you do need to check is the legality of payday loans. They are not entirely legal in every state of the country. States such as Arizona, Arkansas, Connecticut, Georgia Maryland, Massachusetts, New Jersey, New Mexico, New York, Pennsylvania, North Carolina, Vermont, West Virginia have completely banned payday loans of any kind. In states where they are legal, usually there is some kind of upper cap in terms of interest rates.
It might get very difficult to get small loans from big banks or institutions if you don’t have a good enough credit score or not a high paying job. For small and temporary needs, payday loans can be a life saver. A lot of payday lenders will decide upon the principle taking your current income into account.
Remember that if you do decide to go for a payday loan, check its legality in your jurisdiction. Also make sure you are going to a trusted lender who won’t try to rip you off with exorbitant interest rates.