Running low in cash before payday or having to pay for an unforeseen bill can happen to many households particularly to those who live from paycheck to paycheck. And the way to bridge gaps between paychecks or meet unexpected expenses is through payday loans. However, many people do not realize the dangers of applying for payday cash loan or any type of unsecured cash advance loan. It is an instant source of money; but is comes with a price.
How payday loan Works?
Payday loan works easy. The borrower will file an application over the phone, at local lending office or on the internet to a payday loan company. Once approved, the amount borrowed will be deposited to the borrower's bank account within 24 hours (if the borrower applied in person, he may choose to receive the money instantly). Sometimes, the borrower can get approval in 15 minutes. In return, the borrower will have to issue a postdated check amounting to total cost of money borrowed, plus interest (thus, payday loan is also called postdated check loan). The ease of application does not end here, it is said that anyone with a present job can be approved with this loan. Applicants of the loan will have to meet 3 requirements to get approved: a current job, an active savings account, and an age of 18 years and above. Sometimes these are also called 'dummy requirements'. And since, it is virtually impossible to get rejected on each loan application; it becomes increasingly popular among those who need instant cash instantly, even to those who just want to have extra cash on their wallet for security. Nonetheless, borrowing money from this type of loan has a catch.
What is that catch?
When you borrow money from payday loan companies, you subject yourself to debt with high interest rate. In most cases, payday loan companies will charge an interest rate for as much as 50% a week. Meaning, if you borrow $200 today, you will have to pay your lender $300 back next week. That's $100 taken away from your next budget. But others look at it as small amount to pay comparing with the thousands of dollars they pay for the interest of their mortgage. Be aware that there is a big difference between the interest paid from house mortgage and payday loan.
Since payday loan is a short-term loan, you have to pay the money back within 15 days or depending on the agreement you made with your lender. But once you miss paying after the agreed period, penalty will be given. So, say you were unable to pay or you had forgotten to pay the $200 plus $100 interest after 2 weeks, you will be obliged to pay $450 on the second week. That's 225% from what you originally borrowed. And it will grow even further with every week you miss your payment. Soon enough, your debt will grow and you will be unable to pay for it anymore. And since you are under contract with your lender, you are also vulnerable to lawsuit. This is why financial experts say that payday loan is a form of loan sharking, placing unsuspecting borrower under deeper financing burden.
Moreover, the US Federal Trade Commission discourages everyone from using payday loan as source of emergency money. The payday loan companies, however, argue that they must place high interest with every approval they make since they are lending money to persons they do not know. Nevertheless, the borrowers will have to pay the price of applying for payday loan.
Although it seems that payday loan is something you have to disregard to treat as source of emergency money, you have to realize that it is you who will determine if applying for a payday loan is good or bad. Payday loan companies have already disclosed they offer. It is up to you to take it or find another source of emergency money. Alternatives include cash advance from employer, credit card cash advance, emergency assistance program, credit union loan, etc. But if you still need the services of payday loan companies, be sure to take extra precaution in borrowing money so that you will not end up having more debt than you originally have.
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