Payday loans are usually meant for the working-class people who are prone to face different difficulties daily for making ends meet that is often broke at the end of the month. These loans work in a way that requires to be paid back within 7 to 60 days, depending on the loan provider. This short tenure, urgent nature of the loan and repayment risk makes the loan very costly. However, people are willing to take it just because of the convenience it offers in the case of any emergency that persists.
A few loans are considered to as affordable payday loans, whereas on the other hand, these are generally an expensive formula and also has an ability to make your situation worse if you can’t afford to pay it back on time. It is essential to think carefully before choosing one.
The procedure of Payday Loans
Don’t assume that you can’t get a more suitable loan elsewhere – even if you have a low credit rating.
For instance, if an emergency breaks out just like your dentist asks you to get a root canal done on an urgent basis that costs near Rs.30,000, but you are seven to ten days away from your payday, and your bank account is on the verge of being empty then having a pay loan can be the best option to go for.
You go to one of the several online payday lenders who offer you convenient payday loans. Still, as expected, the salary is a few days away wherein you will be required to apply for a loan and tenure of seven days and a principal amount of Rs.30,000 at 1% interest per day.
So, Rs.30,000 (Amount borrowed) + Rs. 2100 (Interest) = Rs.32,100 to be repaid within 7 days.
Essentially, if you have to take a 30-day loan, you are paying 30% interest. If you take a 60-day loan, you are paying 60% interest. And in case you are late, you are likely to pay penalties on a per-day basis.
- Quick and easy: It is often referred to as a fast loan which is approved and is prone to disbursed within a few minutes without any lengthy hassles.
- Minimum documentation: The primary requirement that the bank asks for is to have an account that will allow you to share minimum personal and financial details, not asking you for any extensive documentation.
- No credit check: The affordable payday loans are often available by the working that accounts for no credit checks or collaterals that are said to be involved. Anybody can help with this offer or loan irrespective of their financial backgrounds.
- High-Interest Rates: However, the interest rate per day may seem manageable, when it is usually annualized, they turn out to be 400% annual interest (APR) or even more. The APR can even go up to 9000% for concise loans. In perspective, credit cards have an APR of 9-30%, generally, which means it requires thorough knowledge and detailing when applied for payday loans.
- Debt Trap: If you are unable to repay the loan in the next month itself, the spiraling over often incur huge penalties along with various additional costs. This very reason makes pay loans attractive but can still be a barrier to the borrower, which will often make it impossible to repay going ahead, making the probability of a debt trap genuine.
Once you agree on the loans, it is vital to know that many payday lenders will ask you to set up a recurring payment (also known as a continuous payment authority or CPA).
This will ensure the lenders to take what you owe directly from your bank account via your debit card on the repayment date. Although the pay loans come in handy, it is still risky. It might not leave you enough money in your account for other bill payments, such as mortgage or rent, or other essential spendings, such as heating or food. And it could take you over your overdraft limit, leading to bank charges.
If you don’t feel a CPA will leave you in enough control, ask the lender if you can get in other ways.
You can cancel a CPA when you still owe the debt, so you need to repay it another way.
There are plenty of ways how you can wish to avoid such traps, thereby reducing the amounts as to know they’re limited in how many times they can roll over a loan, which must give you an information sheet each time with details of free debt advice providers.
Once you move forward with the rolling over, your payday loan might seem like a great solution at the time. Still, you should also be aware of the fact that it can quickly lead to problems because you’ll have to pay back much more in interest and other fees, which could leave you struggling to pay for the essentials you need.