Payday Loans 101: What is it really, its working and interest rates

Do you often get an urgent expense in the middle of the month? Are you anticipating multiple payments before the arrival of your salary? Or are you just planning to throw a party without robbing off your savings?

If your answer to most of the above questions is a yes, a payday loan might just save your grace. It is a kind of cash advance or a short-term loan proffered by non-bank companies, like Finance 27, — basically a loan that lets you bear the unexpected expenses.

Here is everything that you need to know about payday loans.

What are payday loans?

As mentioned above, payday loans are small cash advances proffered to you to meet your expenses until your next paycheck arrives. They are credit-based loans in which the principal is a part of your next paycheck. They do not need any collateral, and hence, they are known to be unsecured personal loans. However, some lenders may take post-dated checks to deposit on the next payday. Due to the urgent nature and high risk potential of these loans, they often yield a high interest.

Once you get approval for a payday loan, the non-bank company will lend a small sum of money to you. You are obligated to pay back these loans with a fee once you receive your paycheck. The lender extends the loan based on your income, as well as credit profile.

Payday loans are also known as check advance loans or cash advance loans.

How do these loans work?

Every payday loan company works differently. They have different norms for lending and collecting funds as well as different interests and fees. You can get a payday loan either from the physical branch of the company or online.

Applying for payday loans is an easy process. Here are the basic requirements for getting a payday loan:

  • You must have a job or any other source of an income
  • You must be 18 years old (You need to submit a valid ID proving your age.)
  • You must have an active bank account or prepaid card account.

Once you have met these basic requirements and got approval, you will receive the loan within 24 hours. You can get the money by check or cash. You can also get it deposited directly in your bank account.

How to repay the loan?

You can repay the loan with a single payment on the due day, which is usually your following payday or any other pre-decided date. You can pay off the debt by-

  • A check on the next payday
  • A postdated check (given to the lender on the day you apply for the loan)
  • Directly from your bank account
  • Via lender’s website
  • Any other form of credit

You will be bound to return the funds in full, along with the finance charge at the arrival of your next paycheck. If you fail to do so, the lender has all the right to withdraw the full loan amount plus the interest from your bank account, or your lender may allow you to roll over the loan for extra fees.

Loan interest

Payday loans have earned a reputation of being the priciest kind of loans. The lenders charge high interest, which is up to 5% per month. It may not sound much, but with add-ons like administration fees, the final rate goes high.

The bottom line

Though expensive, payday loans are your savior when you have no way out. As far as the high interest rate is concerned, getting an instant loan for an unforeseen expense is worth all the additional expense.

So, if you find yourself in a situation where you need instant cash, do not hesitate to apply for a payday loan. But, make sure you select the lender wisely and go through their terms and conditions thoroughly to get the best out of it.