Payday Loans Explained

Need a small loan of $50 to $2000 in a hurry? One option is to get a payday loan. It's a convenient, short term loan that you have to pay back on your next payday. But if you don't pay back the loan on time, things can get very expensive. So should you take out a payday loan? Read this article to find out.

What is a payday loan?

A payday loan is a convenient, easy way to get a small cash loan fast. The purpose of a payday loan is to bridge the gap between paydays. It provides you with funds to pay an urgent bill that you need to pay right away when you've run out of cash between paydays.

It takes about 30 minutes to apply for a payday loan and you can have the money in your bank account the following day (sometimes on the same day). The length, or term, of the loan is only short, usually 14 days, but sometimes 28 days. You're supposed to pay the loan back on your next payday (in 14 days) along with the loan fee.

How much does it cost?

The fee on a payday loan is usually $15 for every $100 borrowed. So if you loan $400 you will be charged a $60 fee, and when the loan term is up (in 14 days) you will be required to pay a total of $460 back to the payday lender.

How do you get a payday loan?

You can apply for a payday loan from a payday lender online or in a shop. To get a payday loan you simply have to prove your identity and show proof that you have a regular income. Once approved for the loan, the money will be deposited into your bank account or you will be given a check or cash on the spot. The ease, speed and convenience of getting a payday loan makes them very inviting.

Can I get a payday loan if I have a bad credit score?

Yes. Most payday lenders don't check your credit score. So you can get a payday loan even if you have a bad credit score.

How a payday loan works

Here's how the payday loan process works:

1. You apply for the loan online or in a shop.
2. You agree to pay back the borrowed amount plus the fee on your next payday. Most lenders will require you to give them your bank details so they can automatically deduct the amount from your bank account on your payday. Or if you apply in a shop they will have you write a check for the amount and agree not to cash the check until your next payday.
3. The lender deposits the money in your bank account the next day, but sometimes on the same day, or hands you cash or a check if you applied in a shop.
4. On your payday the lender debits your account for the total amount of the loan plus the fee, or cashes the check.
5. If you can't afford to pay off the loan plus the fee on your next payday you can rollover the loan and extend it for another 14 days for another fee. But this can get very expensive as I'm about to explain.

The dangers of a payday loan

Payday loans start to get very expensive if you cannot afford to pay them back in full when the loan term is up (come your payday). If you rollover your payday loan a few times, things can get very expensive. Let's take a look.

Imagine you take out a loan for $500 and are charged a $75 fee ($15 for each $100 borrowed). That's a 15% interest rate on the loan. It's a relatively high interest rate, but it's manageable, so long as you can pay it back in full on your next payday and settle the loan.

But imagine, come your payday, you don't have the $575 needed to settle the loan. What do you do? Well, you'll have to pay the $75 fee and then rollover the loan for another 14 days, which will of course cost you another $75.

So, now, that $500 loan, which you've rolled over once, has cost you $150 in fees (2 x $75). That's a 30% interest rate on the loan. It's getting pretty expensive.

Now lets say you rollover that loan three more times, for a total of four rollovers, before you settle the loan. With four rollovers you've paid $375 in fees for a $500 loan over eight weeks. That's an interest rate of 75%.

And, if you were really strapped for cash and didn't pay back the loan for one year (or in other words rolled it over 26 times) it would cost you $1950 in fees! That's a yearly interest rate of roughly 405%. That's a very expensive loan!

So should I get a payday loan?

Most people get into trouble with payday loans because they don't have the money to pay them off in full when they get their next pay check.

Don't take out a payday loan unless you are 100% confident that you can pay it all back in full -- the loan principal and the fee -- on your next payday, or at the very most, after one or two rollovers. Otherwise that payday loan will get very expensive!

It goes without saying that if you're taking out a new payday loan every few months it has the same effect as rolling one over continuously: the fees (the interest rate you're paying on the loan) skyrockets.

If you're going to get a payday loan be sure to first visit www.paydayloaninfo.com and check what the rules for payday lenders in your state are. Also, check out www.cfsa.net an organization setup to promote responsible payday loan lending.