You may have seen many advertisements and promotional
messages online for different institutions offering payday advances, check
advances, post dated check loans. Irrespective of what they are calling themselves
these people are providing payday loans in general.
How do these payday
loans work?
A borrower usually
writes a check with a written amount that is a little more than that of the
amount which they are borrowing. The lender usually holds onto the same check
till the loan becomes due, which is usually the payday of the borrower. Apart
from the amount borrowed the lender also deducts a transaction fee that would
be the equivalent of an interest in a regular loan. Payday loans are
usually short term and the interests are usually high.
Like other kinds of loan the federal Lending Act requires
lenders to specify exactly the amount you will be paying back. Meaning that a
lender has to specify the finance charge and the Annual Percentage Rate (Annual
Percentage Rate) you will be paying.
Impact of Payday
Loans on Credit
A payday loan or a cash advance has a deep impact on your
credit. How deep? Consider that you are borrowing $100 at a fee of $15 for the
loan. The lender agrees to hold your check till your next payday when the check
is deposited and you pay $115 in cash or you roll over and get charged $15 more
for 14 more days. Now consider that you roll over 3 times then with the annual
percentage rate of 391 you would end up paying $60 on the loan of $100.
Planning Before Cash
Advance
A payday loan is a good idea for a really short-term loan
but if you keep extending it you might be paying out way more than you should.
You should go for this option if you absolutely have to, with no other options
being available. There are alternatives such as taking loans from your credit
union or any other option with a low APR. This option is something you go for
when there are absolutely no alternatives.
If you are working out a debt and are facing trouble, you
can contact your creditors and loan servicers to ask for more time. Some
creditors will work with you if they are convinced that you are acting out of
good faith. Whenever you plan out loans you must have some cash in the reserve
so that you have some funds to handle the extra cost.
Budgeting and
planning are possibly the best way to prepare against any kind of financial
difficulty. You should do this before you consider any kind of loan. If you
have never done any budgeting previously then you need not panic. Now is as
good as a time as any to start planning. Simply start by collecting receipts of
purchases and categorize them according to the expenses. When you are done with
this you will have a better idea of your expenses. Simply compare it to the
income and see whether you have spent more or less. Consider how much savings you are putting
into each paycheck. Make a habit of sending that much portion of your payment
directly into a savings account and probably you won’t miss it. These kinds of
activities make you financially stable. After this you should be able to pay
your online payday loans the first
time around.
You do not control the circumstances that will come up but
you can surely prepare for it. Learn about payday loans and understand the
necessary details before you apply for one.
John Lee is an independent financial consultant. He is
currently researching payday loans and their impact on credit.
Do you have have any questions or suggestions? Fill free to write in comment section.
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