If you’re in a bind and need cash fast, a payday loan can be a good option. But there are some things you should know before taking out a payday loan to make sure it’s the right decision for you.
In this blog post, we’ll cover what payday loans are, how they work, the benefits and drawbacks of taking out a payday loan, and how you can use them to your advantage.
So if you’re considering a payday loan, read on to learn more.
What are payday loans.
A payday loan is a small, short-term unsecured loan, “bridge” loan intended to cover a borrower’s expenses until their next payday. Payday loans are also known as cash advances, because they provide the borrower with cash in advance of their paycheck.
How do payday loans work? A typical payday loan works by the borrower writing a check to the lender for the amount they wish to borrow plus a fee. The lender then gives the borrower the amount of the check minus the fee in cash. The borrower then has until their next payday to repay the loan by either returning to the store and paying in cash, or letting the lender deposit the check.
The fees charged for payday loans are usually a percentage of the face value of the check, plus a flat fee. For example, if you take out a $100 payday loan with a $15 fee, you will write a check for $115 and will receive $100 in cash. On your next payday, you will need to either return to the store and pay off your loan with $115 in cash, or let them deposit your check and they will deduct what you owe plus any additional fees from your bank account.
What are the benefits of taking out a payday loan?
There are several benefits of taking out a payday loan:
1) They can help you cover unexpected expenses: If you have an unexpected car repair or medical bill that needs to be paid right away, a payday loan can help you cover these costs until you get your next paycheck.
2) They can help improve your credit score: If you make timely payments on your payday loan, this can help improve your credit score over time.
3) They can help consolidate debt: If you have multiple debts with high interest rates (such as credit card debt), taking out a lower interest rate payday loan can help you consolidate these debts into one monthly payment with a lower overall interest rate. This can save you money over time and help get your debt under control.
What are drawbacks of taking out a payday loan?
While there are several benefits to taking out a payday loan, there are also some drawbacks:
1) High interest rates: Payday loans typically have much higher interest rates than other types of loans (such as personal loans or auto loans), which means that you will end up paying more in interest over time if you take out a payday loan and carry it for an extended period of time.
2) Short repayment terms: Since most people use their next paycheck to repay their payday loan, this means that they only have 2-4 weeks to repay their entire loan amount plus interest before needing to take out another one – which can lead to spiraling debt if not managed carefully.
3) Potential for overdrafts: If you do not have enough money in your bank account when it comes time to repay your loan and allow the lender to deposit your check/make an ACH withdrawal from your account, this could trigger overdraft fees from your bank – which can add even more costs onto an already expensive type of borrowing!
How can you use payday loans to your advantage.
If you have an unexpected expense, such as a car repair or medical bill, and you don’t have the money to cover it, a payday loan can be a good option. Payday loans are quick and easy to get, and they can help you avoid late fees or overdraft charges.
Use payday loans to improve your credit score.
If you make your payments on time and in full, taking out a payday loan can actually help improve your credit score. This is because payday lender report your payment history to the credit bureaus. So, if you’re looking to improve your credit score, a payday loan can be a good option.
Use payday loans to consolidate debt.
If you have multiple debts with high interest rates, consolidating those debts into one loan with a lower interest rate can save you money in the long run. And because payday loans typically have shorter terms than other types of loans, you could be debt-free sooner than you think!
Conclusion
If used correctly, payday loans can be a helpful tool to manage your finances. They can be used for emergency expenses, to improve your credit score, or to consolidate debt. Payday loans can be expensive, so it is important to understand the terms and conditions before taking one out. When used wisely, payday loans can help you get back on track financially.