The truth about payday loans

Does it seem like payday loan shops are everywhere these days? From your local strip mall, to ads popping up everywhere on webpages you visit often. But what really is a payday loan? And is it such a band thing like most people say? Were going to give you the real answers on payday loans here at AAR Financial.

What is a payday loan?

The truth about payday loans is that they can be very costly. People who tend to gravitate to these kinds of loans should exercise extreme cautious and make sure they pay the amount back as soon as possible. These loans tend to be priced at a fixed dollar fee, which represents the finance charge to the borrower. These loans have very short terms, and because of this the cost of borrowing money is quite high. The lender usually requests a pre-dated check or debit authorization from the borrower in return for the loan.

How do payday loans work?

Here’s an example that will explain payday loans very simply. For example, say your car breaks down and you decide to borrow 500$ for the repairs from a payday loans lender. You will write a check to the lender for $580 which is the amount plus a finance fee.

When applying for a payday loan online you would usually type this information online. The lender will usually advance you the amount requested ($500) for a set period, usually 14 days. When that 14 day period is up, you are expected to pay the lender back $580 in cash, let them deposit the postdated check. If you do not pay the debt in full at the end of the term, you will be charged additional fees and finance charges.

Who uses these kinds of loans?

Anyone with a steady income or a checking account can obtain a payday loan easily. Although, borrowers who are unable to obtain a savings account or have access to credit cards generally use payday loans. Since payday loans do not require a credit check, people with credit problems or no credit to begin with.

What are the benefits?

The benefits of a payday loan would be that it’s a convenient tool for borrowing quickly and easily during an emergency if no other option is available to you. If in case you have an emergency medial bill, car repair or other one time expense, a payday loan may be what you are looking for. Also beneficial for those who aren’t able to gain access to credit cards or savings.

What are the negatives?

One of the most important things to remember if you do take out a payday loan is to pay back the loan as soon as possible. Many people who are unable to payback the loan as soon as possible find themselves facing expensive additional fees putting them into more debt. Many borrowers find themselves stuck in what is called the payday loan cycle for a long time, which ends up being very costly and leads to larger financial troubles. Payday loans tend to be much more expensive than other conventional methods of borrowing money. In most cases, the APR which is the annual percentage rate on a payday loan averages about 400%. But the APR can often go up as high as 5,000%. A standard credit card from a traditional bank has an APR of 12% and a standard loan APR is around 7%. In the event of an emergency, it is generally better to use a credit card or tap into your savings during this situation.

Should I apply for a payday loan?

Some things you should consider before applying for a payday loan, should be to take a step back and consider your other options if available. Ask yourself if what you need the money for is really an emergency. In the case the situation is an emergency, it is a good idea although only as a last resort, otherwise payday loans are not usually recommended for expenses that are unnecessary. Think about other ways to borrow money:

Payday Loan Alternatives:

  • Borrow from AAR Financial!
  • Negotiate with a creditor for a payment plan
  • Use your credit card
  • Request an advance from your employer
  • Obtain a line of credit from an approved lender
  • Dig into your savings account
  • Borrow money from a relative
  • Request more time to pay a bill from your creditor
  • Use a cash advance on your credit card

If in case, the final result is that you still would like to apply for an emergency payday loan, please make sure to understand all the costs and terms before you apply.

Tips:

  • Shop around at different payday lenders and choose one that offers the lowest rates and fees
  • Be sure to only borrow as much as you can pay back with your next paycheck in order to avoid paying excess fees
  • When you get paid, make it your first priority to pay back the loan What are some things I can do to prepare for financial emergencies?
  • Prioritize your expenses
  • Keep an emergency fund
  • Inquire about insurance which can help protect against financial emergencies
  • Open a checking account at a credit union or community bank
  • A generally strong financial position will leave you much more prepared if an emergency arises

How to improve your credit score

  • Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.
  • Try to pay your bills in full by the due date. If you aren’t able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
  • Try to pay your debts as quickly as possible.
  • Don’t go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
  • Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
  • Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card.
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