Payday Loans Help Beat The Budget Crunch

| September 10, 2012

Sometimes someone with a good job needs just a little money for just a little while to make ends meet. These are the people that payday loans are meant to serve. Short-term loans of small amounts secured by the borrower’s next paycheck can help consumers with unexpected expenses. They can also mean the difference between making a payment on time and incurring a huge late fee. A payday loan can be a good deal if it is properly used, but borrowers should be sure they understand everything about the loan before going through with the transaction.

How a payday loan works

The basic model of a payday loan involves consumers borrowing a relatively small amount of money, and then repaying the whole amount just as soon as they get paid. Within this broad category, however, there are two varieties of payday loan.

The traditional payday loan

The original way a borrower took out a payday loan was by visiting a brick-and-mortar loan store. A member of staff reviewed the customer’s pay stubs and/or bank statements and, if the loan was approved, the borrower wrote a check post-dated as of the next payday for the amount of the loan and all the interest and fees involved. If the borrower did not show up to pay the loan and collect the check, the lender was free to cash the check.

The modern payday loan

A more modern way to get a payday loan is to complete an online application. In some cases certain documentation may have to be presented by fax, but the borrower still does not have to go to the loan store in person. If the loan is approved, the money goes into the borrower’s account via direct deposit. When the loan comes due, principle, interest and fees are all withdrawn electronically, again without the borrower visiting a loan store.

Payday loan interest

A typical payday loan does not involve compound interest. Because the loan is for a short set period, there is no need to compound interest periodically as is done on longer term loans. This makes it difficult to compare the interest charged on a payday loan with that on a car loan or a mortgage, since the longer term loans state the rate as an Annual Percentage Rate, or APR. This is calculated by multiplying the interest rate per payment period by the number of periods in a year. Since a payday loan has only one payment period, the math is skewed so that its rate appear enormous.

Payday loan rates really are somewhat higher than other loans. This is because of the high cost of processing the loan relative to its dollar amount as well as the high risk of the loan to the lender. The cost is still reasonable, however, especially if the borrower makes payment on time and so incurs no additional fees. It may be more useful to compare the cost of a payday loan with that of the late fees and penalties that will be incurred without it, rather than with another species of loan.

A payday loan can be a very useful tool to a careful consumer who uses it judiciously. By limiting the amount of the principle to what can be easily repaid and then repaying on time, the borrower can meet immediate needs without paying an inordinate amount for the loan. Unexpected expenses to repair a car needed to get to work or a refrigerator containing expensive food that might spoil can be covered by a payday loan. So can medical bills, and even recurring expenses like fuel, rent and utility bills. When consumers need a little extra to make ends meet, payday loans may be just the tool for the job.

Related Resource :

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Category: Payday Loan

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