Payday loans are a type of short-term loan that can provide quick cash when you need it most. These loans come with high interest rates and fees, and are usually due in full within two weeks or before your next paycheck. Although many people assume that payday lenders charge high interest because they deal with high-risk customers, default rates are usually quite low. When you don't have a financial cushion and need quick cash, a payday advance may seem like a good solution.
However, it's important to understand the risks associated with payday loans before you sign on the dotted line. Payday lenders rely on regular customers, often low-income minorities, who charge exorbitant compound interest on cash advances. To determine your rate and terms, the payday lender may request a strict credit check to see your credit score, although this is less common with a payday loan. Also, most payday lenders don't perform a credit check; if the lender isn't interested in your credit history, this could be a sign that you're dealing with a payday lender.
If your payday lender doesn't require a strict credit check and you can repay the full amount by the required date, a payday loan will usually not negatively affect your credit. However, this does not mean that you will be approved for the highest amount allowed by law. A payday lender can consider your income when deciding how much you can borrow. But other payday lenders may not assess your ability to pay or your other obligations, leaving you at risk of financial overshoot. Many states now regulate interest rates on payday loans and many lenders have withdrawn from states that do.
But even if you live in an area where payday loans are legal, there are still better options than taking out one of these high-cost loans. Consider other methods of stretching your finances until your next paycheck instead. Before taking out a payday loan, it's important to weigh the pros and cons carefully. Payday loans can provide quick cash when you need it most, but they come with high interest rates and fees that can put you in a worse financial situation if you're not careful.
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