Payday loans offer a quick way for you to have access to cash as these loans are designed to cover you when you fall short before payday. However, before you decide to take out a payday loan you will first need to know how they work, the fees and the interest that will be charged.
How Payday Loans Work
Payday loans work by offering you a small amount of money that is given to you as a loan.
They are referred to as payday loans because the amount and terms are set in accordance with your income and when you are paid. These loans are engineered to be paid back when you get your next paycheck.
Payday loan lenders are usually found online and will offer users a quick approval process and the fund can even be transferred into your account within a day.
These personal loans might also work for those that have bad credit as the lender will look at your current financial situation and if you are able to pay it back.
Payday Loans Interest Rate
Payday loans will charge you a set amount in fees that work like interest rates. The fee that you pay for a payday loan can be quite high and you are often charged a 20% establishment fee and a 4% monthly fee.
There are strict lending guidelines for payday lenders that have been set out by the government in order to avoid irresponsible lending. The fees that you will pay for a payday loan are:
- Establishment fee – this is 20% of the amount you borrow
- Monthly fee – this is 4% of the amount you borrow
- Government fees and charges
- Default fees – the lender will charge these if you default on the loan.
- Enforcement expenses – if you fail to pay the loan back, the lender will take you to court where you will pay.
These restrictions help in keeping payday loans manageable, but you should compare them to other credit options.
There are credit cards that do have interest rates of about 20%, but these are charged over a year and not over a month like payday loans.
The interest rates on a personal loan are generally between 8% and 15% and are a yearly rate.
With payday loans you will need to take in consideration your personal finances and if this is an affordable loan.