Payday Loans: Interest Rates, Quick Access, Repayment Tips

What is a payday loan?

A Payday loan has very high interest rates and short-term repayment demands. One may obtain a loan in order to meet urgent financial obligations until the subsequent payday. A bank does not give a payday loan to invest in your next global idea. Instead, the bank grants it to pay for urgent expenses like rent, groceries, or medical bills. 

Payday loans are usually calculated according to your earnings—given by the lender after much access to the borrower’s account. The lender can deduce that the account holder can repay that loan in their next payment, usually within 30 days. 

How Payday loan works

Across different states in the United States, laws that surround payday loans can vary from state to state. Some laws regulate the amount a borrower can get, while some cap the interest rate that a lender can charge in interest or fees. Payday loans can be granted depending on where you live. However, In the United States, about sixteen states have prohibited Payday loans of any kind

There are many states that prohibit payday loans, including the District of Columbia and Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, North Carolina, Pennsylvania, Montana, New Hampshire, New Jersey, New York, South Dakota, and Vermont. 

Upon approval after applying, a borrower will get the loan into their account by cash or cheque. The borrower is expected to deposit the Loan and the interest back to the lender in two weeks or a month. 

How much can a borrower expect to be loaned?

As previously stated, the policies guiding a payday loan run vary from state to state. This means that the loan amount available to people from state to state varies based on the laws that govern loans in that state. However, typically, a borrower can access loans as low as $350 in Minnesota and as high as 1000 dollars in Texas and Illinois. 

The loan interest is also state-dependent; some can go for ten percent while others are at an outrageous cost of 30%. That means a typical loan of 100 dollars to be repaid in two weeks should cost only about 15-20 dollars (15-20%). This calculation also shows that the average percentage rate (APR) interest on the loan will be almost 400% at the end of the year. 

15%/14 days1.07% per day
1.07% *  365 days 391.07%
Approximate400%

Note- Ensure you are clear on interest rates, terms and conditions, and the consequences of defaulting before you accept a loan from a lender. Do not let your desperation drive you into a bad deal. 

Repayment of Payday Loan

A payday loan differs from the kind of loan that most lenders expect to receive its repayment in instalments; therefore, finding out the exact day the loan will lapse will be of great help because most lenders begin to charge for a default almost immediately. 

A borrower can repay a loan through any of them;

  • Online by using the lender’s website
  • An automated withdrawal from a bank account
  • A postdated cheque on the application
  • A cheque on your next payday

Advantages and Disadvantages of a payday loan 

Advantages

  • Payday loans are straightforward to access: Since they are generally used to foot emergency bills, they will be only effective if they are accessible to the borrower. This is the main benefit of payday loans- their easy accessibility. Many lenders will pay the borrower in less than 24 hours.
  • Their requirements are manageable: Unlike traditional loans from banks that require a lot of processes and paperwork, and some even collateral. Payday loans only need you to have a little paperwork done. In fact, with internet lenders, you can get approved from the comfort of your home.
  • Borrowers with poor credit and lower incomes can be considered:  Borrowers with poor credit and lower incomes are more likely to receive approval from payday lenders even though they do not meet the standard eligibility requirements of banks and other major street establishments.

Disadvantages

  • Payday Loans often come with high interest rates: They usually have a yearly percentage rate of 398%, compared to 28-36% for high-interest credit cards.
  • Payday loans almost result in bad financial management: People often need help paying back loans in the two weeks that are usually given, which forces them to borrow more money or pay more fees, which adds to their debt.
  • Some payday lenders ask that you grant them access to your account: The lender often prescribes this as a strategy to reduce the stress of filling out forms that banks require. The downside is that the lender needs to deduct the charges soon, and then they can remove them more than once. 

Quick Summary 

A payday loan is short-term but comes with a high-interest rate and is meant to cover immediate expenses until the next paycheck. Repayment typically occurs within 30 days, with varying state regulations. Borrowers should be aware of high interest rates, typically around 400% APR, and consider the advantages of easy accessibility but the disadvantages of high interest rates and potential debt cycle. 

Repayment can be made online, through automated withdrawal, a postdated check, or a check on the next payday. Access to payday loans varies by state, with 16 states and the District of Columbia banning them. Before accepting a loan, borrowers should consider terms and conditions to avoid potential financial pitfalls.

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