What Is a Payday loan?
Many of us have been there, and you’re not alone. According to Pew’s Payday Lending in America series, one survey shows that “5.5 percent of U.S. adults spend $7.4 billion annually at payday lenders.” A payday loan, which is typically a high-interest, short-term loan with interest rates ranging from 300 percent to 1000 percent annually, usually start out as a solution to the problem but can often plunge you further into debt.
The loan’s APR (annual percentage rate of charge) depend on a few things: how the APR is calculated (nominal vs. effective), duration of loan, loan fees incurred, late payment fees, non-payments fees and loan renewal actions. Your APR represents the interest paid on a full-year loan. However, the term for most payday loans is only two to four weeks.
For the average person taking out a payday loan, paying back the amount of money borrowed in two to four weeks is almost impossible. But this allows for the lenders to spike the APR rates and charge high levels of interest to people who can’t pay back the loan in full within the time frame.
How to Get a Loan
The process of acquiring one of these “loans” is simple enough. Many payday lenders only require you to have a checking/savings account and a steady income. In fact, compared to car, school and home loans, the process is easier than any other loan process I’ve experienced. Simply log on to the lender’s website, enter your personal and demographic info, choose the loan amount, agree to the terms, sign the contract and wait for a response that occurs typically within five to 10 minutes. After that, the money is usually in your account within 24 hours.
Pawnshop loans work a little differently. To begin you have to offer something of value in exchange for a percentage of the value of that item in cash. At the time of this exchange, the pawnbroker will give you a contract, which consists of the short-term loan and added high-interest rates. At the end of the terms of the contract, if you have not paid your outstanding balance, including interest and all fees, the pawnshop can keep your item or sell it.
A study done by Payday Loans Turbo shows that the average demographic of loan seekers tend to be between the ages of 25 to 44.This often included households with low-level incomes who may have been laid off or fired. Other characteristics such as race, marital status and people with children may be contributing factors to the number of occurrences of these loans. On average, borrowers tend to take out eight separate loans per year ranging anywhere from $300 to $500, and end up spending over $500 on interest rates alone.
Make Sure You’re Ready to Commit
While a short-term loan may seem like the best option to save your skin in the moment, I would urge you to follow this advice:
• Do your research.
• Ask questions.
• Don’t sign a contract without fully understanding the terms you’ve agreed to.
The choices that you make today will affect your future, your credit and your ability to make big purchases like a home or car when the time comes around. While these options may have worked for some, your best resource may be trustworthy friends and family who will allow you to borrow a certain amount through the creation of a payment plan without the interest rates. I know I would rather be indebted to my family than in debt with an organization that makes no promises to actually scoop you out of debt.