When you are faced with an emergency requiring financial attention, the most viable option is to borrow a small loan from money lenders. However, it’s important to understand the basics before applying for a payday loan to avoid surprises along the way.
We have created a list of 10 things you should know when considering a payday loan application.
1. Interest Rates Can Be High
Payday lenders must create a report on the Annual Percentage Rate (APR), stating the interest you are required to part with if you applied for loans all year round. It is common to have a rate of up to 5,000% throughout the year.
However, instead of quoting the rates using APR measurements, payday lenders prefer using other terms such as “1% daily” interest. The latter sounds like an affordable rate, but when you do the math, you’ll understand that the amount you owe is almost thrice the amount you borrowed.
2. Lenders May Have Access to Your Bank Account
When filling out your details, you may come across a section requiring you to give bank information. Most lenders take repayments through debit cards, authorized by the “Continuous Payment Authorities,” which can occur without reaching for your approval. Setting up the process is an easy task but opting out or canceling comes with a lot of challenges, causing you major issues with your financial management.
3. You Can Cancel Payments
It’s important to know that you can opt out of payments by requesting your bank to do that on your behalf. Following regulations set in November 2009, CPAs attached to your card can be terminated once you put out a directive to your bank by giving out your lender’s details. All payments deducted after this directive are refundable to your account.
4. Most Lenders May Ask for Recurring Payments
Most payday lenders will require you to create a recurring payment, called a CPA, allowing them to receive direct payments of the agreed amount from your bank. The amount is repaid through your debit card at the scheduled period until the entire debt is cleared.
While this setup comes in handy, it can also be quite risky. The direct deductions keep reducing the money in your bank account, making it hard to settle other bills. It can also dive into your overdraft, resulting in bank charges.
5. You Could Incur Additional Fees
You are likely to incur additional fees if you can’t settle your loan at the set time. These charges can also result from having a debt rollover or borrowing a top-up amount. According to CFPB, over 25% of the borrowers re-borrow more than nine times after the first loan approval.
You can accrue additional fees from;
- Charges for non-sufficient funds- This occurs when your bank account lacks enough money to settle loan repayments when your lender requests it.
- Charges for late repayments- Penalty for making repayments later than the time agreed upon with your lender.
- Rollover fees- You’ll have to pay a certain amount of money if you want to prolong your loan repayment period.
6. Payment Flexibility
The repayment period determines the amount of money you’ll be paying back to your lender every month. Having a long repayment period leads to lower monthly payments. However, the accrued interest is high because it has a lot of time to be compounded.
Borrowers should select a manageable schedule for themselves, seeking alternatives with the lowest interest rates. Some lenders give a payment period of up to seven years or more, while others require you to pay back within a few months.
7. Most Payday Loans are Short-Term
As the term suggests, a payday loan is money you borrow to sustain your financial needs until you receive your salary for the next month. It requires you to pay back within the shortest period possible, preferably in one lump sum.
The Office of Fair Trading says that 30 out of every 100 borrowers request for a loan rollover as they can’t manage to settle their debts within the given period. Others borrow a top-up loan or pay off the interest without settling the principal.
8. Be Sure You Can Repay Your Loan
Lenders are responsible for gauging your loan-repayment capability through thorough background checks. However, reports from the Office of Fair Trading show that most payday lenders rarely do proper checks.
In that case, you should ensure that you can pay back the loan in time by doing a budget and analyzing your income flow. Make sure you can settle other bills while servicing your loan to avoid financial inconveniences.
If your income or budget does not cater to such needs, look for alternatives or refrain from borrowing the loan.
9. You May Be Intimidated for Not Repaying
Lenders are likely to reach out to you when you fail to make repayments. They are concerned about the issue and may not stop bothering you until you pay.
Prepare to receive repeated calls as the lenders intimidate you into settling your debts, especially when your payments are late.
10. Personal Loans Offer Flexibility
Cash advance online same-day loans are specifically tied to a particular purpose. Car loans, for example, are issued to borrowers who intend to acquire a car. You can apply for an installment loan from reputable loan providers, such as Viva Payday Loans to settle bills or spend on other things.
Personal loans create a wide range of options on how you can spend them without any restrictions from your lenders. Before applying for the loan, understand whether it’s tied to a specific purpose or if you can spend it on whatever you want.
The loan amount you are qualified to borrow depends on your income and what your payday lender is willing to give you. However, some states have set regulations on the highest amount you can borrow from payday lenders.
Some states have restrictions on borrowers seeking to take multiple loans before repaying a previous loan, saving borrowers from paying high-interest charges on such loans.