If you’re playing with the idea of getting a payday loan, then chances are that you have a lot of questions. What are payday loans? How do payday loans work? How do they affect your credit? Are there better options out there? So, here’s a general breakdown of what you need to know about them before you commit to this form of credit.
A payday loan is effectively a form of short-term lending that comes in low loan amounts, typically $500 or less, and is also high-cost, with interest rates that tend to go as high as the triple-digit range. They are usually meant to be repaid in full once your next paycheck arrives, and to qualify, all you really need is to provide proof of identification, a steady income, and an active bank account.
In other words, you can even get a payday loan for the unemployed here, but keep in mind that approval for this will often vary depending on what your alternative source of income is and also the lender’s own borrowing criteria.
How Do Payday Loans Work?
The application process for payday loans is usually a little different based on the lender that you use, but here are the main steps that you might typically take when applying for one.
Step 1: Review your budget
Before you decide to take out a payday loan, it is important that you know how much you need to borrow and how much you can afford to repay. This usually means estimating your monthly payments and comparing them to the interest rates being offered.
Step 2: Compare lenders
If you decide to get payday loans from CocoLoan, you will be able to pre-qualify and compare multiple loan providers to find the best deal possible. This means reviewing interest rates, terms, and fees to ensure that you partner with the lender that can offer you the most favorable loan.
Step 3: Sign your loan agreement
Once you’ve found the appropriate loan offer, the next step is to e-sign the agreement, at which time the lender will begin processing your cash. In most circumstances, your cash will be available as soon as the next working day.
You should also keep in mind that most payday lenders will usually ask for signed permission to withdraw the repayment electronically from your bank account once the scheduled due date arrives.
How Do Payday Loans Impact Your Credit?
One of the advantages of applying for payday loans is that they don’t usually involve hard credit checks. This is because most payday lenders will not use your credit score as a way to determine whether or not you qualify for funding.
Furthermore, payday loans will not usually appear on your credit report, and paying them on time will not boost your credit score either. However, it is important to remember that failing to repay your loan on time can potentially hurt your credit score.
This is because the payday lender may decide to sell your debt to a collection agency, and if they report the unpaid loan to any of the major credit bureaus, this could significantly lower your credit score.
What Are the Risks of Payday Loans?
The risk of borrowing payday loans is that they often come with extremely high interest rates and fees that can often make them extremely difficult to repay. And while the exact amount tends to vary, you can often expect to get charged around $15 for every $100 borrowed, on average.
Also, since the loan repayment period is significantly short, it is often very easy to find borrowers struggling to repay their loans on time. As a result, it is not uncommon for many borrowers to apply for rollovers, and the problem with this is that they can end up creating a cycle of debt that can often be difficult to overcome.
It is for this reason that you should only ever borrow payday loans if you are completely sure that you can afford to make the repayments on time. You should also take the time to evaluate different payday loan choices using a credit service like CocoLoan until you locate the one that can provide you with the best potential rates and terms.
Are Payday Loans Legal?
It is important to note that certain states do not permit payday loans, while others have imposed strict caps and restrictions with regard to the loan amounts, interest rates, fees, and costs that can be charged to borrowers.
The main intention behind this is to try and prevent borrowers from getting stuck in a cycle of debt. At this point in time, there are 13 states that have completely banned payday loans, which are Maryland, Arizona, North Carolina, Connecticut, Arkansas, Georgia, Pennsylvania, the District of Columbia, New Jersey, Massachusetts, Vermont, New York, and West Virginia.
How to Avoid Payday Loans?
If you need cash in a hurry but are not looking to borrow a payday loan for one reason or another, then there are a few viable alternatives that you can consider. For one, you can apply for a 0% APR intro credit card, which will allow you to make interest-free payments for a limited period of time. However, once the introductory period ends, you will be made to pay interest on the remaining balance, so keep that in mind.
Another alternative is to apply for a personal loan from a bank or credit union. They often come with higher loan limits, lower interest fees, and longer repayment periods compared to payday loans.
However, the downside of this option is that you will need to have a good credit score to be eligible. Plus, unlike payday loans, they often take days to be processed, which can be inconvenient if you need the funds in a hurry.
You can also apply for bad-credit loans via CocoLoan, which are designed to cater to borrowers with poor credit histories. They often come with lower interest rates and fees, as well as higher loan limits than payday loans, not to mention the fact that they can even be processed in as little as 24 hours, which makes them the next best alternative to payday loans.
Borrowing a payday loan can be a great way to get yourself out of an urgent financial jam. After all, they can be processed on the same day, and they don’t even require you to have a good credit score. However, it is crucial that you remain very cautious before you decide to sign on the dotted line, because failure to repay these loans can put you in a financial hole that can be tough to get out of.
A general rule that you should always follow is to only borrow these loans if you need to pay for something that cannot be delayed and requires urgent attention, e.g., a medical bill or utility bill. Furthermore, you should only consider taking out a payday loan if all other, cheaper forms of credit are not viable for one reason or another.
If this is the case, you should then make sure to review your monthly income and monthly expenses to see if there really is any room left to afford the payday loan, alongside its high interest rates. If the answer is yes, then you can feel free to apply for one via CocoLoan today.