Simply put, a payday loan is a short-term loan option that can cover your most urgent and immediate cash needs as you wait for your next pay cheque. Payday loans not only offer instant solutions in times of financial crisis but also help expand your family budget.
This type of short-term borrowing is based on a borrower’s average income. Payments are usually made within or by the end of two weeks. A payday loan is ideal if you have bad credit or in cases where other options are off the table.
Before submitting your loan application, you should carefully learn about what’s a payday loan. Here are seven quick facts about payday loans for beginners:
1. Who Can Give You a Payday Loan?
Typically, payday lenders are small credit merchants that receive credit applications and approve loans. They may either have physical offices or, better yet, offer the services online.
When dealing with online lenders, you need to be extra careful to avoid possible scams. Do a background check on the payday loan service provider to ensure they are licensed to operate by the relevant licensing agencies.
Other payday loan lenders include check cashers, storefront lenders, pawnshops, credit unions and banks. Banks and credit card companies are often overlooked when acquiring a payday loan owing to their required credit checks and rigorous vetting process for loan applicants.
2. Eligibility Criteria for Payday Loan Applicants
Did you know that nearly 2 million Canadians take out payday loans every year? These numbers have been on the rise as payday loans are fairly easy to get. To be eligible for payday loans, you need to provide some sort of identification, have a steady pay cheque, and have a credible bank account.
Moreover, you should not have received eight loans within the last 12 months before your payday loan application date. This loan is ideal for those without alternative financing options, credit, or reliable income.
3. How to Apply for a Payday Loan?
Before applying for a loan, make sure you have all the required documents, which include a recent pay stub from your current employer and your bank account number. Next, simply fill out a registration form online or at the service provider’s office indicating how much you wish to borrow.
Once your loan request has been approved, the lender may give you the money in cash, wire it to your account, or provide it to you by cheque for deposit. You are expected to repay the loan in full together with interest within 14 days or by the next payday.
4. How Much Can I Borrow?
Loan amounts vary from one region to another depending on the prevailing laws. Aside from the laws for a particular locality, other factors determine how much you can borrow. A borrower’s credit score and history, together with a percentage of the borrower’s anticipated short-term income, may also be taken into consideration.
5. Payday Loan Interest Rates
Some laws limit the loan amounts and interest rates charged on payday loans. These laws are solely formulated and implemented by individual regions.
Usually, most lenders charge an interest rate of $15-$20 for every $100 borrowed. Lenders are required by law to disclose their rates to borrowers, which helps you make a more informed decision when choosing a lender. Before you sign any contract, check the annual percentage rate (APR) charges for the amount of money you plan to borrow.
6. Paying Back a Payday Loan
Generally, you are expected to pay back a payday loan using a single payment by your next payday. Since the repayment terms vary from one lender to another, confirm the specific repayment date.
Your repayment options may include creating a postdated cheque during your application, writing a cheque on your payday, sending the money online through the lender’s website, or sending it via direct debit from your account or any other form of credit. In case you fail to repay the loan by the due date, the lender may be able to electronically withdraw the funds from your account.
7. The Rollover Loan Option
Where the borrower is unable to repay the loan, the lender may advise them to choose a loan renewal or a loan rollover feature. With a rollover, the lender allows the remaining balance from the old loan to spill over into a new loan. Therefore, the existing loan is renewed.
This gives a borrower the chance to pay the larger loan balance at a future date. All the borrower has to pay instantly is the loan fee. This is a good option if you end up needing to borrow more money for a short while.
Payday loans can provide you with money when you need it most. They come in handy when most of the other financing options typically available to you are off the table. While they attract high APRs, if you settle them on time, they are an ideal financing option that could get you out of a difficult financial situation.