A payday loan, as the term suggests, is a sum that is lent until the borrower’s next payday. While micro-financing helps fund small entrepreneurship, payday loans options are designed to help individuals in need of accessible loans. Such short-term loans are received on the Internet or through storefront lenders, depending on local laws.
The emergence of payday lending has provided a form of accessible loan, as requirements are less rigid than conventional banks generally demand. The lender usually demands:
- the contact information,
- income information,
- a bank account.
Applicants with little or no credit history and less collateral may still be eligible for a payday alternative. The size of such loans, as the name implies, is smaller. Additionally, loan amounts are often restricted by state regulations. In general, limits may range between $100 and $1000, where $500 is the most popular option.
Unlike payday loans with equal monthly repayments, repayment of payday amounts is fulfilled at once, and the period is considerably shorter – ending on the borrower’s next payday (alternatively, the next pension date, or the like). The due date will be explicitly stated in your agreement and the period usually constitutes 2-4 weeks from the date of borrowing. Understandably, as regards interest, the personal loans also differ from the alternatives with lengthier repayment periods. In essence, they belong to two distinct economic models.
Interest is essentially the cost of your loan – that is, how much your lender will add to the provided sum (your principal balance). A payday loans might cost only $30 for every $200 that you borrow. This equals a 15-percent simple interest rate. For a period of two weeks, it is possible to establish the daily interest cost as $30/14 days = $2.14. Such amounts are justified, given the accessibility of borrowing and the quick repayment.
Many lenders embed calculators into their websites displaying full details of their offers.
Moreover, lenders are obliged to disclose all costs, including the annual percentage rate (APR), before any agreement is signed.
Although this figure may exceed the normal amount for other types of loans, it is not fully relevant, since a payday loan is repaid over a 2-4-week period – only a fraction of a full year.
Overall, payday loans have their competitive advantages over alternative forms of lending. The economic crisis has boosted demand for payday options.
By making modest loans more accessible, financial institutions contribute to the well-being of the public. Such short-term lending helps individuals cope with financial difficulties and gives them a chance to revamp their credit history.