There’s nothing more frustrating than being short on cash while needing to cover a necessary expense. This is especially true if the person has no savings or an emergency fund that can cover the said cost. Because of this, taking out a payday loan can be an excellent option.
According to Investopedia, a payday loan refers to an unsecured short-term financial solution that a borrower can avail of based on their income. Also known as a cash advance, it’s designed to help borrowers who need some quick cash to cover an immediate financial need, but it should be paid within a short period or until the next paycheck arrives.
However, for first-time borrowers, there are other essential things they should know about payday loans. By getting familiar with how these loans work, they’ll figure out whether payday loans are the perfect solution for their financial needs.
Below are the three things first-time borrowers should know about payday loans:
- They do not need an excellent credit score to qualify
Unlike other traditional loans, payday loans don’t consider credit score an essential qualification. Although some lenders might check your credit rating, they don’t usually base their loan approval decision solely on the strength or weakness of the credit score.
Hence, applying for a payday loan won’t be a huge problem for a first-time borrower with a low credit score. As long as they meet the minimum eligibility requirements provided by the lender, they’ll have a better chance of getting approved for the loan.
Even if the qualifications vary from one lender to another, most loan providers require that first-time borrowers be of legal age according to their state laws and have a bank account and proof of a regular source of income.
However, if you’re a first-time borrower who lives in Nova Scotia or other nearby places, having an in-depth understanding of how you can become eligible for payday loans in the area can be crucial. This can help determine whether you need an excellent credit score to qualify. So, to get started, you can check out some websites to discover more information.
- They usually have high-interest rates and other related risks
Compared to other types of loans, payday loans usually have high-interest rates due to several reasons. First, payday loans are considered unsecured, short-term loans that borrowers need to pay within a short time, such as the next payday check.
Not only that, but the total interest rates may also soar if the borrower fails to repay the loan within the agreed period.
For instance, Consumer Financial Protection mentioned that approximately 80% of payday loans aren’t paid in two weeks or upon the arrival of the next pay cycle. Consequently, the interest rate increases, making the loan almost impossible to pay off.
Moreover, payday loans come with high-interest rates because they’re highly unregulated in most states, so lenders tend to charge more interest than what is legally allowed.
Payday lending isn’t legal in all states in America. While it can be allowed in other countries, it’s banned in states like Maryland, Georgia, and New York.
With all these things being said, first-time borrowers should exercise caution when taking out a payday loan. They can perform thorough research about their prospective lenders, their interest rates, and other important information, such as whether it’s allowed in your state.
But despite the risks associated with high-interest rates, payday loans can be helpful in certain situations. In an article published by U.S. News & World Report, Steve Rhode, a consumer debt expert, mentioned that payday loans can be something to consider if the borrower needs cash within a short time and knows they can fully pay them on time.
- They are different from personal loans
Another thing first-time borrowers should know about payday loans is that they differ from traditional personal loans. Although both of them are used to help borrowers with financial needs, payday loans can be differentiated from personal loans in the following ways:
- Amount To Borrow: Typically, payday loans are usually available in small amounts. Since they’re designed to be paid over a short period, a first-time borrower can only borrow money not exceeding a thousand dollars. Also, they should keep in mind that lenders usually determine the amount of loan you can take based on their income.
- Borrowing Terms: Unlike personal loans, which have a borrowing term ranging from a year to several years on an installment basis, payday loans need to be repaid in weeks.
- Easy Application: Payday loans are easy to apply for. With the advent of online payday lenders, loan applications can be made digitally by filling in an application form and submitting the necessary documents. Also, taking out a payday loan doesn’t require credit checks, making the entire process much easier and faster.
Indeed, payday loans can be helpful for borrowers who have a financial emergency but are without adequate savings. However, like other types of financial services in the market, there are many things you need to know about payday lending. Fortunately, by keeping the information mentioned above in mind, first-time borrowers will know precisely how they can use payday loans to their advantage.