Payday loans are a common type of small amount loan that are typically taken out to cover essential expenses before the next paycheck comes in. However, even though they seem very simple, there are a few things that you should know about payday loans and how they work before applying for one.
In this article, we’re going to explain various things you should know about
payday loans and how they work prior to getting one. Keep reading now to learn everything you need to know about payday loans and how they work.
What Is a Payday Loan?
Many may be confused as to what sets a payday loan apart from other types of loans. While there isn’t a definition that’s set in stone, payday loans are typically loans that are short term and high cost. They can be taken out in various amounts, but many of them are around $500 and are typically due to be paid back on your next pay day.
The majority of payday loans come with a very high interest rate, often upwards of 100% APR. Because of this high interest rate, it’s best to pay back the loan on time. Paying a payday loan back late with result in high amounts of accrued interest, which can add up fast with such a high APR.
For example, if you were to take out a $500 payday loan and failed to repay it on time, 100% or more of the principal would be added as interest. This would turn that $500 loan into a $1000 loan, and it would continue to grow the longer you went without paying it off.
How Do Payday Loans Work?
Today, payday loans are offered by individual brokers and sometimes larger banks or financial institutions. The bank or broker makes money on the loan through interest, which should be paid off as soon as possible to avoid paying too much extra in interest.
Payday loans have been heavily influenced by everything that led up to their inception and institution at the state and federal level. Payday loans have become so widespread that several federally chartered banks and other large financial institutions have begun to offer them as well. It is no longer confined to small payday loan vendors, as more and more large banks are offering them too.
Besides this area of advancement, a number of lenders are offering payday loans online. This makes them more accessible than ever, which has led more and more consumers to take out payday loans in recent years. Payday loans are designed to help cover expenses on short-term periods, intended to be paid back relatively quickly. This way, not too much is paid on interest for the borrower.