Peoples' State Bank

What is a Payday Loan and How Not to Get into a Debt Circle

Whatever happens in life, a car or washing machine breaks down, an unexpected illness, or an invitation to a holiday, a payday loan can help any moment. Some people are afraid of payday loans, but, in fact, there is nothing wrong with them. You just need to know what you are dealing with and act carefully.

What does Payday Loan Mean?

A payday loan is a short-term loan for a small amount. Payday loans are unsecured, which means that the borrower does not need collateral to obtain them. The most common loan amount for a payday loan is around $500. However, lenders offer amounts up to $1,000.

Despite the fact that many people consider payday loans to be a type of external financial assistance, this is not entirely true. Most payday loans are taken out to pay rent or for current expenses such as food and transportation.

However, it does not stop making payday loans a way to get money urgently. The positive side of such loans is that the borrower can access the funds when the loan application is sent or on the next business day.

How Does a Payday Loan Work?

A payday loan can be called one of the simplest existing loans.

The first thing a borrower needs to do is fill out a loan application. This can be done online, using a computer, using an app on a mobile phone, or in a lender's store. A minimum of documents is required to complete the application. The main thing for the borrower is to confirm his identity and his income. And, of course, to have an account to which money will be transferred later.

After the lender receives the application, it will conduct a soft check. This type of check does not require credit bureau inquiries and does not appear on the borrower's credit history. If everything is in order, the borrower will receive an email notification that the application has been approved. Although the process seems lengthy, it usually takes a few minutes.

If the loan application is approved, the borrower must sign the loan agreement by the lender. Before signing the contract, it is worth rereading it carefully, paying attention to interest rates, loan terms, and fees that some lenders may charge. After signing the agreement, the borrower should expect the money within the period specified in the agreement. There may be differences for each lender, but often the borrower is unlikely to wait more than one business day.

The loan amount plus interest and fees will need to be repaid in a lump sum within the period agreed with the lender.

Can a Borrower Get a Payday Loan with Bad Credit?

Another positive side of payday loans is that they are available to everyone, including people with bad credit.

The main thing that payday lenders look at is the borrower's income. And if the income allows the repayment of the loan, the borrower will most likely receive it.

In addition, lenders do not do hard checks, as they do for personal loans, for example, so it does not affect or worsen a borrower's credit history in any way. On the other hand, even if the borrowers repay the payday loan on time, this will not improve their credit history because such loans are not displayed in it.

How not to Fall Into the Debt Trap?

The main problem with payday loans is that their APR is usually quite high. This is something that borrowers should pay attention to and keep in mind. To avoid the debt trap, the borrower should make sure that he can repay this money in one payment within the specified period before taking out a loan. Otherwise, the borrower will be forced to take another loan to pay off the existing one, thereby driving himself into a debt trap.