What to Know Before Signing for a Payday Loan
When it comes to borrowing money, there are multiple ways and options for Americans to research. Some examples include bank lending, credit card lending, margin lending, and payday loans. If you are looking for a short-term loan, payday loans may be the way to go. However, reading the terms and conditions and understanding what these types of loans entail are very important before signing on the dotted line.
Also known as cash advance or check advance loans, pay day loans are issued for the sole purpose of borrowing money quickly for situations such as emergencies. For the most part, employees of all types of industries are paid weekly, semi-monthly, or monthly. Cash advance loans are originated with the “promise” of receiving the borrower’s next paycheck or payday. This is why these loans are not usually longer than two to four weeks.
As with other loans, a credit check and income verification of the borrower will be conducted by the lender. Credit history and current credit scores are vital parts of determining the interest rate of a loan and the viability of the borrower. The loan officer may require pay stubs from the borrower too. This allows the lender to base the loan’s principal, or initial amount of the loan borrowed, off current earnings on a short-term level of the borrower. Like all loans, collateral is required. In some cases, the borrower’s paycheck can become the collateral for the loan.
One big downfall of cash advance loans are the very high interest rates. Since the borrower is in a bind for cash fast, lenders are able to charge a higher interest rate than standard loans and get a substantial return on investment. Typically these types of loans are not for very much money, but the cost in the end for the borrower can be more costly than what was initially needed. Financial institutions may also charge fees along with the higher interest rate. Some lenders charge a three-digit APR or annual percentage rate.
These loans are heavily regulated by individual states, with some not allowing them altogether. Reading the terms of the loan before signing is crucial. Mostly, these types of loans are originated at a physical location of credit lenders, but some online lenders may offer this service as well.
When it comes to borrowing money, the United States provides many ways for Americans to do just that. Payday loans may be the way to go for short-term loans, as long as the borrower repays the loan fast and reads the fine-print of the terms and conditions.