It is designed for emergency purposes, and it is characterized by two of its main benefits: speed and availability. Bad credit may not automatically disqualify an applicant. If you are interested in financing your emergency expenses, then you picked the perfect place to get started.
What is a Payday Loan?
A payday loan, also known as a cash advance, is often used as an alternative to traditional financing, such as personal loans from a bank or credit union. Payday loans are often used with the same purpose as personal loans. Both can cover expenses such as medical bills, debt consolidation, or otherwise big purchases.
Online payday loans are different from a traditional personal loan in a few ways, though. The main difference is in payday loans’ basic terms.
Payday loans are considered short-term. That means they are due back quickly – usually as soon as the borrower’s next paycheck arrives. For this reason, payday loans are best used to fund a short-term expense when you’re strapped for cash between paychecks. Depending on state regulations, payday loans can sometimes be refinanced or rolled over at a fee if the borrower cannot repay the loan within the agreed-upon time frame. However, it is still best to pay off a payday loan as soon as possible, as the loan will continue to accumulate interest and fees until it is repaid in full.
Payday loans are high-interest. Another difference between payday loans and traditional personal loans is that payday lenders may charge a higher annual percentage rate (APR), which is the interest rate tacked onto the loan. Other fees that may be tacked on include finance charges, an origination fee, and rollover fees (if applicable). These fees are usually higher than what you will see with traditional loans.
Though a payday loan can sometimes be more expensive than a traditional personal loan, there are several reasons why consumers choose payday loans over bank loans.
For one, they are more readily available for consumers with little or no credit history. While all payday and cash advance lenders will check credit before approving an applicant for a loan, payday lenders often do not have strict credit requirements like banks and credit unions. Unlike bank loans, there may be no credit minimum to apply or even to be approved for a payday loan.
Additionally, payday loans are sometimes a quicker source of cash than personal loans. Often, the paperwork needed to obtain a bank loan is extensive and tedious. You may not even be approved in time, if at all, considering how strict traditional financiers’ requirements can be. Bank loans may take up to one week to be approved and 30 days to disburse funds.
This speediness is attributed to the fact that payday lenders are direct lenders, meaning they supply the money themselves. This is unlike banks, which have to go through another company to supply borrowers with the loan amount.
Payday Loans at a Glance
- Distributed through a direct lender
- High-interest with additional fees
- Best used in case of emergency; not a long-term financial solution
- Can be used to cover most expenses
Many states will place limits on the interest of a loan. Nineteen states have regulations that limit the APR on a small consumer loan to 36% or less, while most other states allow higher rates, according to the Center for Responsible Lending and the Consumer Financial Protection Bureau.
Many states will restrict the loan term and amount. Your state may even keep you from borrowing money if you have too many outstanding balances. To practice responsible lending, check your state’s webpage to see what applies to your circumstance.