Payday loans (PLs) are short-term debentures designed to help individuals with unplanned and small expenses. They usually range from $5 to $1,000 (even more). PLs can be very easy to get, but the interest rates on these debentures tend to be much higher compared to other types of credits- it is not uncommon for these credits have an Annual Percentage Rate of 1,500%.
People will usually pay these debentures the next time they get their salary, although some lending firms allow more flexibility. The payment is usually taken out of the borrower’s salary through direct debit, so it is imperative to have enough money in place – fees for missed payments can accumulate very quickly.
Who can get these loans?
People over eighteen can apply for PL. But whether they are approved will depend on their loan history, as well as financial information, and the payday firm’s own requirements. The lower the person’s credit score, the less likely they will get approved.
Some financial institutions specialize in payday debentures for individuals with bad credit scores. It means they can accept applications even if the borrower’s score is pretty low. But borrowers may need to pay a higher interest rate as a result.
Will these things affect the borrower’s credit score?
Usually, the person’s credit score will not be damaged by PLs as long as the person repays it 100% and on time. There are exceptions to the rule: if a certain firm sees PLs negatively (for instance, because they believe PL customers are less reliable borrowers), having one in the person’s credit history could be bad for them.
People also need to keep in mind that if a person would apply for a loan on the day without collateral (learn more here: Lån penger på dagen uten sikkerhet at businesscasestudies.co.uk), it can temporarily lower their credit score because of the hard search, as well as the new account is added to their profile.
People do not just have one score. Credit reference firms, lending organizations, as well as other financial institutions will calculate the person’s score using their own criteria and method. So a PL may affect their credit score differently with different firms. A lot of lending organizations know that consumers who use these types of debentures are not in dire financial straits – as a matter of fact, some do not even differentiate between PLs and other types of debentures.
Risks of PLs
One of the most significant risks is getting sucked into the debt trap – for instance, borrowing funds because the person is short on cash, then being short on cash again because they are paying back a debenture with an additional interest rate. PLs can hit people with charges for not paying them on the agreed-upon term or in full. Regulatory agencies cap these charges at less than $20 plus an interest rate on the amount people borrowed.
But considering how high these IRs are on these types of debentures – often around 1,000% Annual Percentage Rate – being unable to pay it can get pretty expensive. Remember that IR is calculated as a percentage of the borrowed money, and it is usually charged on a daily basis for PLs. So the larger the loan, the longer borrowers have it for, and the more IR they will pay.
When are these things a bad idea?
People should not take likely get a PL. It is a bad idea if they are already sucked into the debt trap or are not one hundred percent sure they can afford to pay it back. Because of the risks involved and high interest rate in getting these debentures, it is usually not worth it for things that can be delayed or to purchase things they do not need at the moment.
In cases like this, it may be a good idea to save some money, borrow from friends and family members, or lot for cheaper types of debentures. As mentioned before, PL should be fine with the person’s credit score, but it usually depends on the firm’s criteria.
In this case, people should avoid getting this kind of debenture if they have other options or an important loan application coming up, like applying for a housing debenture. Housing loan providers are strict when it comes to assessing a person’s affordability.
The payday debenture could suggest that people are in financial hardships or that they are not good at managing their finances. If the borrower still thinks this type of debenture is right for them, they need to make sure they read the fine print from top to bottom, stick to their budget, and make sure there is enough money in their account on repayment dates.
What if the borrower has this type of debenture and changes their mind?
If the borrower got this kind of debenture fourteen days ago or less – in short, within the cooling-off period – they can withdraw from the agreement. They will need to pay off 100% of the borrowed amount with additional interest. Any additional fees need to be refunded to the borrower.
How to consolidate these things?
Some individuals choose to consolidate their debentures, which can simplify repayments, as well as minimize the amount of the IR they are being charged. Consolidation means moving the debt from more than one account to just one with a lower IR. This solution is only suitable for some individuals – and applying for another account can lower the person’s credit score.