At certain point in your lifeyou need to make important financial decisions, when the case is horrible. These dire situations call for urgent measures.The payday loans are one of the many comforting measures, explored by those who need money.
However, hearing about payday loans is one thing, but understanding the principles surrounding it is another. To make an informed decision, it’s important to weigh all possible options while learning the rules of payday loans. This article takes an in-depth look at payday loans to help you decide if they suit your needs.
Payday loans are short term loans that are due for payment on the borrower’s next payday. These payday loans are usually high-cost and target people who have poor credit records. Often, payday loans serve as a safe haven in emergencies as the borrower gets a lump sum that’ll be paid back via deductions from their account when they are paid their wages next.
This loan is different from personal loans as it takes a different approach to deduction and has a higher interest fee. The annual percentage rate of payday loans is quite steep, and it tends to be about 400% of the principal.
How does a payday loan work?
A payday loan is quite unlike every other type of loan, as it’s linked to the paycheck of the borrower.This means when you go to borrow a payday loan, your account details are documented.That way, they can deduct the money as soon as you receive your wages. As soon as your payday loan is approved, you need to give the lender a postdated cheque that falls around the period you’re most likely going to get your wages. Furthermore, getting a payday loan isn’t usually dependent on the credit rating.This means that you can get a payday loan even with bad credit.
Major differences between payday loans and personal loans
Personal loans are quite different from payday loans for the duration of payment and method of application.
- Duration of payday advance loans: Payday loans are short-term loans that are meant to be paid back as soon as the borrower gets their next paycheck, and this period is usually not more than 30 days. On the other hand, personal loans are obtained to pay back in installments over a long duration.
- Lender type: It’s also important to point out that payday loans are offered by businesses that offer such loans to make profits while financial platforms like banks offer personal loans.
- Requirements: Personal loans are more structured when it comes to requirements for obtaining the loans. Usually, an intending borrower needs to present credit score rating records before they can be considered for the loan. A bad credit score is likely to put the borrower at a great disadvantage when obtaining the loan. Payday loans, on the other hand, do not have such stringent requirements as the borrower is only required to be of age and have the necessary means to pay back.
- Mode of repayment: There is a stark contrast between both loan types in this aspect, as personal loans can be paid back in installments of an agreed fee. However, payday loans are required to be paid in a lumpsum along with accruing interest within the period of the borrower’s next paycheck.
- Ease of accessing payday loans online: Payday loans are relatively easy to access online, and this doesn’t apply to personal loans. Most online payday loan lenders give out payday online loans within minutes of application. On the other hand, personal loans might require the borrower to show up at the financial platform physically, and disbursement takes days to months after application.
- Interest rates of payday advance loans: Payday loans have high-interest rates when compared to personal loans. This means payday loans cannot be used for debt consolidation.