There are people who believe that payday loans are debt traps but this is very far from the truth. The only people who get into serious trouble with payday loans are people who misuse these loans. It is very important for people to know how a payday loan works. This is the best way to enjoy these loans.
A payday loan is basically a short term loan. It works the same way a bank overdraft does. This loan is meant for workers who earn salaries. The loan an also be taken by people who run businesses. The loan is called a payday loan because it is meant to be repaid on the next payday.
A salary earner may have an urgent need for cash and cannot afford to wait until the next payday. This individual can simply apply for a payday loan. If the loan is granted, the borrower solves his or her problem with the cash and repays the money on the next payday. As long as this procedure is followed, everybody will be happy. The money lender gets paid interest for making the loan available and the borrower is happy to avoid financial embarrassment by taking the option of a payday loan.
Unlike bank loans, payday loans do not require a lot of paper work. These loans do not even require the borrower to provide any form of collateral. All the candidate needs is evidence that he or she has a job. The borrower may also need to have a bank account because some payday loans are paid into the bank accounts of the borrower. In some cases, the payday lenders may run credit checks on the borrower. In some cases, they do not. The fact that the person who wants a payday loan has a job is usually enough for most firms which give payday loans.
Another feature of the payday loan is speed. In some cases, it is possible to apply for a payday loan and get the loan on the same day. Most payday loans take about 24-72 hours to process. The only problem with the payday loan is that the interest rate on these loans can be quite high. This is easy to understand because these loans are not long term loans. Again, people who take payday loans do not usually ask for large sums of money. Most payday loans range from just $100-$1,500. As long as the borrower pays back the money immediately it is due, the interest on the payday loan cannot become a problem.
People who take payday loans run into problems if they do not repay the loan on the next payday. The interest on payday loans can be as high as 10% per month. If the borrower delays in repaying the loan, a very small loan can rise to a huge amount of money in matter of months. The money lender cannot be blamed for this because delaying the payday loan is an abuse of the payday loan by the borrower.
A payday loan is not a long term loan and it should not be used to pay off other debts. People who take payday loans should use the loans judiciously and repay the money at the right time. This is how a payday loan works and this is why the borrower needs to avoid making the payday loan a habit.