What is Payday Loan and How Does it Work?

Payday loans have become very popular over the past few years, because, they can be applied for over the internet and get approved within a single business day.

Is payday loans perfect for a financial emergency or do they lead to bankruptcy? In reality, they do come in handy during a financial emergency and are the best option for your financial needs in certain situations.

Websites like PaydayMe are trying to clear this doubt by offering loans at no extra charges from their side. These platforms directly link borrowers and lenders.

What are Payday Loans?

Payday loans are regular loans that are for short term borrowing and have a high-interest rate.  It can also be considered as a cash advance. People tend to take payday loans during financial emergencies which they can pay for later but not at the moment.

Advantages of Payday loans

Before you apply for a loan at the time of a financial emergency, it is advisable to analyse the pros and cons of the options.

Let’s have a look at the advantages of payday loans.

1.   Easily Available

Since the dawn of digitalization, many financial services have expanded to the internet, payday loans being one of them. You can find many websites online that provide payday loans.

In case of any emergency, you don’t have to fill lengthy forms and can get the funds within one business day.

2.   Less Formalities

One of the reasons why payday loans are very popular is because there are very less formalities. You have to fill up one normal form and if your loan gets approved you get to choose your lender.

The lender will perform a standard credit score check to make sure that the borrower is legitimate and directly transfer the money into your account. All this can happen within a single business day.

3.   Credit Score Protected

Short-term payday loans help increase your credit rating. You just have to make sure that your next paycheck can clear the previous loan.

4.   No Credit checks

One of the main advantages of payday loans is that no credit check is performed. Thus, your credit history and credit score is insignificant.

How do payday loans work?

  1. Firstly, you need to plan your requirements.
  2. Apply for the loan.
  3. If your loan is approved, your application will be forwarded to the lenders’ network. They will respond and you will be shown the respective results.
  4. You can choose your lender. Note that there is no obligation on you to say yes to a lender if you don’t like their terms.
  5. The short-term payday loans feature a high-interest rate.
  6. You need to repay on time or as soon as you get your pay.

Pitfalls of Payday Loans

While there are a lot of pros to getting a payday loan, there are some downsides as well. The downsides being –

  • Short-term payday loans have a high-interest rate and if you delay repaying, then you might end up with the interest being more than the amount you borrowed.
  • Bounced back cheques from the banks may lead to extra charges.
  • If you’re low on your finances, then payday loans will only make it worse.

Leave a Reply