Payday Loans – How Do They Work and Who Should Use Them?
If you’re planning to take out a loan, a payday loan is one of the many options you’ll find available. Like all other loans, this is a unique product with its own characteristics, and it’s intended to be used in certain situations only. You should not blindly rush into a deal like that without familiarizing yourself with how it works first – otherwise, you risk running into serious financial trouble in the long run.
On the bright side, there is a lot of information about payday loans all over the internet, and you don’t have to search long to find out all the important details. If you’re considering this option, you should know what to expect first. Let’s have a look at some of the more characteristic features of payday loans, and find out when they are an appropriate solution.
The main difference between a payday loan and a regular one is the duration. With most standard loans, you’re given months to pay back what you owe. On the other hand, a payday loan is supposed to be a quick cash “injection” until you get your next paycheck – hence the name. Because of this, payday loans are also typically limited to smaller sums of money, and carry higher interest rates to them. A lender giving out payday loans would expect you to have the whole thing paid off when the deadline approaches.
The high interest rate might seem like a worrying factor, but it’s the only way this business model could make sense for lenders in the first place. You need to see things from their perspective, and be thankful that the modern financial market even provides an option for people in emergency situations in the first place.
When to Go for It
All that said, a payday loan only makes sense in the context of an urgent situation where you have no other options available. The fact that you have to deal with such a high interest rate can make a payday loan a bad idea if you need to get a lot of money, or if you want to pay it off over a longer period of time. Ideally, you should only rely on these loans if you’re certain that you can have everything paid off on the deadline.
You should also have a somewhat stable financial situation underneath you to begin with. A payday loan can be a bad idea if you have no source of income. In fact, many such lenders will not even want to work with you if you don’t have a proven working history with corresponding pay slips.
Things to Be Aware of
As we mentioned above, a payday loan often comes with a very high interest rate. This is a factor you should absolutely pay attention to before taking out any sum of money, because otherwise you might find yourself in a severely distressed financial situation. Many people underestimate how much that interest can stack up over just a very short period of time. Sometimes it only takes a couple of weeks for those extra charges to result in a lot of wasted money.
You should also know what lenders are operating in your area, and compare their deals carefully. There are often more options available to you than you think, but not all of them are immediately obvious. Try to explore your local lending market as thoroughly as possible, and talk to different lenders about their exact conditions.
Does Credit Score Matter?
One of the good things about a payday loan is that it doesn’t require a high credit score in most cases. The short-term nature of the loan, combined with the high interest rate typically charged on it, results in more relaxed conditions with most lenders on the market. Of course, don’t treat this as “free money” – it’s anything but. Some people get the wrong idea when they’re told that their credit score doesn’t matter much in the calculation of their payday loan deals. And unfortunately, these are often the people with a bad credit score in the first place.
A common problem observed among people who start to rely on payday loans too much is that they not rarely find themselves in situations where they’re paying off multiple separate lines of credit. Sometimes, all of those credits might have high interest rates and other unattractive factors attached to them. When it comes to payday loans, this is a situation you don’t want to find yourself into. They’re much harder to pay off if you allow them to stack up, and that’s how most people end up in trouble.
If you keep those things in mind, payday loans can be a useful tool without any unexpected strings attached. The negative attention they’ve received from the media is mostly related to people using them incorrectly and underestimating the consequences. If you’re careful and plan ahead correctly, a payday loan can save you from a lot of trouble in the right moment.