Understanding Payday Loans: What You Need to Know

Payday loans are short-term cash loans based on the borrower's personal check held for a future deposit or electronic access to the borrower's bank account. Learn more about how they work and their risks.

Understanding Payday Loans: What You Need to Know

Payday loans are a type of short-term loan that can help you meet your immediate cash needs until you receive your next paycheck. These small, high-cost loans typically charge triple-digit annual percentage rates (APR), and payments are usually due within two weeks or close to your next payday. Usually, the loan is secured by a part of your next paycheck.

Payday loans

are also known as cash advance loans or check advance loans, and they come with a high interest rate.

They don't require collateral, not even a bank account. Payday loans can be helpful in certain situations, but they come with a high cost. It's important to understand the risks before taking out a payday loan and to make sure you can pay it back on time. Jeannette Bennett, a senior specialist in economic education, explains that the most common payday loan users include those with low incomes and higher-than-average poverty rates.

Payday loans are made at payday loan stores or in stores that sell other financial services, such as check cashing, title loans, rent-to-own, and pawns, depending on state licensing requirements. Most payday lenders don't report payments on time to credit bureaus, so the loan can't help your credit score. If you're considering applying for a payday loan, it's important to use a personal loan calculator to determine what type of interest rate you can afford. Financial experts recommend exploring alternative loan sources before taking out a payday loan.

Additionally, borrowers should be aware of potential penalties such as insufficient funds charges (returned check) from their bank. The Military Lending Act provides certain protections for active duty military personnel and their families who take out payday loans. This includes a 36 percent cap on the Military Annual Percentage Rate (MAPR), as well as other limitations on what lenders can charge for payday and other consumer loans. To repay a loan, borrowers can redeem the check by paying the loan in cash, allow the check to be deposited in the bank, or simply pay the finance charge to extend the loan for another repayment period.

Leave Reply

All fileds with * are required